No Major Correction Yet

by Gus Cosio


Many PSE investors have been waiting for a correction, myself included, for a few weeks now. It hasn't happened in a big way yet. What we have been seeing are intra-day corrections or shallow end of day ones. The market looks expensive from an aggregate point of view, but do not mistake the forest for the trees.
I think the reason why the index has been resilient is because a good number of individual stock still offer good value.

Take 2 very expensive stocks -- ALI & BPI. Both of them were very expensive when they were 20% lower. Why does it defy pricing logic that both stock have gone higher? Well, I think it is because different investors have different investor parameters. One thing common with both ALI & BPI is they both have very stable earnings and high returns on equity. I think the way these 2 stocks are priced reveals one dynamic of the market and that is when institutional investors want an exposure to a particular market, they choose stocks that have both financial soundness and heft.

I think the same thing can be said of SM & SMPH. And as this logic proceeds, we can understand why AC and GTCAP are pushing towards what usual analyst logic would see as expensive.

What we are forgetting is the idea that a game changer has been unfolding in our market which is the idea of a credit ratings upgrade. The forward looking rationale is that money wants to be in the game before it is played. If we believe indeed that the country is up for an upgrade, then the idea of being expensive should not deter us from remaining constructive on local stocks even if analysts see it as expensive. After all, many analysts have been proven wrong many times.

As a matter of strategy then, I think it is still wise to be exposed even to some of these expensive stocks. More importantly, because we expect the economy to do better, we should even be more confident in stocks with cheap valuations and sound financial conditions. This, I think, would be the best way to derive returns in the Philippine market.