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COLing the Shots is a monthly publication by COL which provides insights on investment opportunities based on global and local developments that could affect the market. COLing the Shots aims
to provide timely and relevant information and analysis as well as a model portfolio for successful
investing.
Key Highlights
The PSEi has rallied by 7.8% since we conducted our first half 2016 market briefing presentation
last January 23. The rally did not come as a surprise since the market was technically oversold
as pointed out by COLs chief market technician Juanis Barredo.
There were also some fundamental factors that acted as catalysts for the rally such as the
statement from the ECB that it might increase in the size of its QE this March, the adoption of
negative interest rates by the BoJ, and the Philippine governments announcement of a better
than expected fourth quarter 2015 GDP growth.
Nevertheless, the markets longer term outlook has not changed. Commodity prices are still
expected to remain weak as Chinas economic growth led by industrial production continues
to slow down. The outlook for the peso also remains negative as the Chinese yuan continues
to devalue. Finally, there is a risk that the strong growth in government spending will not be
sustained in the second half of 2016 as this usually slows down during the first six months of a
new presidents term.
Given our cautious view of the market, investors who have a short term investment time horizon
or who are too heavily invested should take advantage of the ongoing rally to sell or reduce their
positions in the market.
EIP investors though should continue to buy stocks, even if they had bought at the peak. This
is because sticking with a peso cost averaging strategy will allow investors to reduce the size of
their drawdown and to recover faster when the market resumes its uptrend.
The main reason why the EIP strategy works is because investors can buy more shares as
prices go down. Moreover, buying continuously as the market drops will allow investors to
reduce average cost. Since average cost is lower, investors portfolio will turn profitable faster
when the market recovers.
Head of Research
April Lynn Tan, CFA
Analysts
George Ching
Richard Laeda, CFA
Charles William Ang, CFA
Jed Frederick Pilarca
Meredith Hazel Cua
Angelo Lecaros
Michelle Angeline Yu
Just a rally
The PSEi has rallied by 7.8% since we conducted our first half 2016 market briefing presentation last
January 23. It is not surprising then that some investors are wondering whether or not we had been
too pessimistic given our cautious view of the market.
However, the markets rally did not come as a surprise. During his presentation last January, our chief
market technician Juanis Barredo already mentioned the possibility of a rally. At 6,084, the market
was already oversold as it fell by a total of 13% in a span of only 16 trading days! Given the markets
oversold condition, Mr. Barredo mentioned that he expected a B wave rally to materialize soon with
a target of 7,000 to 7,400. We are currently in the middle of the said rally.
There were also some fundamental factors that acted as catalysts for the rally. Last January, the
European Central Bank hinted that it might increase in the size of quantitative easing in March
(leading to even more liquidity and lower interest rates). Also in January, the Bank of Japan surprised
investors by announcing that excess deposits with the central bank would no longer earn interest but
instead be charged 0.1%.
In the Philippines, the government announced better than expected GDP growth of 6.3% for the
fourth quarter of 2015.
Nevertheless, the markets longer term outlook has not changed. Commodity prices are still expected
to remain weak as Chinas economic growth led by industrial production continues to slow down.
Two weeks ago, China announced that Januarys manufacturing purchasing managers index (PMI)
came in at 49.4. This implies contraction in the manufacturing sector for the sixth straight month (any
value below 50.0 implies contraction). Moreover, just this week, China disclosed that exports fell by
11.2% while imports dropped by 18.8% in January. The said numbers are significantly slower than
the median forecast of -2.4% for exports and -4.6% for imports.
The outlook for the peso also remains negative as the Chinese yuan continues to devalue.
One of the main drivers of the Philippines stronger than expected GDP growth was government
spending which jumped 17.4% during the fourth quarter. However, there is a risk that the strong
growth in government spending will not be sustained, at least in 2016. Based on the track record of
the past few administrations, government spending usually slows down during the first six months of
a new presidents term. This could also happen once a new president is elected this May.
Exhibit 1: Government spending growth (first six months of term)
President
1st 6 Mos
Term Ave
Cory Aquino
2.00%
3.50%
FVR
-1.80%
2.80%
Erap/GMA
0.60%
-0.30%
GMA
0.30%
6.40%
Pnoy
-6.50%
4.20%
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Given our cautious view of the market, investors who have a short term investment time horizon or
who are too heavily invested should take advantage of the ongoing rally to sell or reduce their positions
in the market. On the other hand, those who are waiting to come back into the market should wait for
prices to fall to more attractive levels before buying back stocks. We would like to reiterate what we
said during our market briefing last January, that this is a buyers market, and that we should only be
accumulating stocks when the PSEi falls below 6,400. Once the B wave rally is completed, the PSEi
is expected to suffer from another wave down or a C wave. Based on what has taken place so far,
there is still no reason to believe that the said scenario will not materialize.
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During the time of the Global Financial crisis, the investor who adopted a buy and hold strategy would
have suffered a maximum drawdown of 56.0% and would have taken 35 months or almost three years
to break even.
On the other hand, the investor who adopted an EIP strategy would have suffered a maximum drawdown
of only 34.9%. It would have also taken the investor only 21 months to breakeven, which is a year and
two months faster.
Exhibit 2: Scenario analysis of Buy & Hold vs. EIP during bear markets
Maximum Drawdown
Months to Breakeven
EIP
EIP
71.60%
46.30%
127
88
56.00%
34.90%
35
21
A small caveat though is that adopting the EIP strategy will mean larger absolute losses in the short
term while markets are falling. This is something that we already warned about during our market
briefing. Nevertheless, you need to have a longer term perspective. Although you will suffer from bigger
absolute losses in the short term, you will turn profitable faster once markets recover. The absolute
value of your profits will also be much larger over the longer term than that of an investor who stopped
investing after buying at the peak.
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Hopefully, the share price of FGEN will recover once its two new plants the San Gabriel and Avion
plants start contributing to profits this year. The first time contribution of the two plans will allow FGENs
profits to jump by 22.3% this year. The said increase is faster than the PSEis 2016E EPS growth of
10%.
Listed companies have started releasing fourth quarter earnings results and we are keeping our
fingers crossed that the fourth quarter earnings season will be much better compared to the past three
quarters. Recall that poor earnings results were one of the catalysts for the PSEis decline from the
peak in April last year.
Among the stocks in our list, only RLC has released earnings so far and results have been better than
expected because of revenues.
Exhibit 3: COLing the Shots stock picks
Sector
Power
Properties
Consumer
Stock
Price
FV
Buy Below
High Conviction
Buy Level
FGEN
18.00
32.70
28.40
16.50
SMPH
21.35
21.70
18.90
12.22
24.00
ALI
31.15
41.67
36.20
MEG
3.33
5.58
4.70
3.05
RLC
25.50
29.60
25.70
19.50
DNL
8.57
8.30
7.20
6.60
CNPF
17.00
21.50
17.20
14.28
Current
Level
Buy Below
Price
6,692.58
6,400.00
5,600.00
4.4125
4.2617
3.729
Equity Fund
The Philequity
PSE Index Fund
XPEIF
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BUY
HOLD
SELL
Important Disclaimers
Securities recommended, offered or sold by COL Financial Group, Inc.are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and it may
be incomplete or condensed. All opinions and estimates constitute the judgment of COLs Equity Research Department as of the date of the report and are
subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a
security. COL Financial ans/or its employees not involved in the preparation of this report may have investments in securities or derivatives of securities of
securities of the companies mentioned in this report, and may trade them in ways different from those discussed in this report.
2401-B East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, 1605 Philippines
Tel: +632 636-5411
Website: http://www.colfinancial.com
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