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.
- The correction that everyone was waiting for came by surprise in April and the PSEi is now down by 3.1% from its 2015 high of 8,134. The best explanation for the market’s drop is funds flow. While we are seeing weakness in favored markets such as the Philippines, Thailand and Indonesia, markets in Japan, China and HK are performing well.
- Interest in the Japanese market is returning as the country is expected to benefit from the government’s aggressive monetary stimulus which has resulted to the significant weakness of the yen. Demand for Japanese equities is also expected to receive a boost as the Bank of Japan last year announced plans to increase its purchase of financial assets include Japanese equity ETFs, while the government pension fund announced plans to increase its portfolio
allocation to Japanese and global equities.
- Meanwhile, sentiment for stocks listed in Shanghai, China is improving as a result of looser monetary policy and accelerated reforms. Finally, sentiment for the HK market improved significantly after China last March allowed Chinese mutual funds without Qualified Domestic Institutional Investor or QDII quotas to invest in HK equities through the Shanghai-HK Stock Connect. This pushed up share prices in HK as valuations of Chinese stocks listed in HK (H shares) are much cheaper compared to those that are listed in China (A shares), allowing investors to take advantage of the arbitrage opportunity.
- Fundamentally, nothing has changed and we remain positive on the Philippine economy. For the said reason, we would like to reiterate our view that pullbacks such as this are opportunities to buy stocks. However, given the significant weakness that we are seeing in Indonesia and other regional markets, there is room to be less aggressive. And since nobody knows where the bottom will be or when the correction will finish, we recommend peso cost averaging instead of lump sum investing, especially when prices hit attractive levels.
- We are adjusting the “BUY Below price” of our “COLing the Shots” stock picks by 10% lower as we believe that the ongoing correction will provide us with an opportunity to buy stocks cheaper. We are also removing AP and CIC from our stock picks list. Last April, AP announced that the commercial operation of the second unit of its Davao Coal Plant will be delayed by around 10 months, hurting AP’s profits in the short term. Since the stock is close to fairly valued, and there is minimal room for positive surprises in the short term, we believe that we can already lock in gains for AP. Meanwhile, since we first recommended CIC early this year, it has already appreciated by 45.5% in price. As a result, valuations are no longer attractive. Therefore, we believe that we can also lock in gains for CIC and wait for pullbacks to repurchase the stock.