Phisix: Local Investors Take On the Driver’s Wheel; Fed Actions Should Be Bullish Long Term

``The strength of your character comes not from how you react to your successes, of which I know there will be many. The strength of your character comes from how you react to your failures, of which there also will be many, especially if you make bold moves. So, always believe in yourself, persevere, but be willing to adapt.”-Larry Bock, Lux Capital

Now we understand that the Phisix has rallied vigorously from its lows to perk up the hopes of the bulls.

Figure 3: PSE: Peso Volume: Declining Volume

Yet we remain unconvinced since technically the rally has been accompanied by diminishing volume (green trend arrow- red arrows marks the tops) as shown in Figure 3. Such rallies are likely characteristics of relief or clearing rallies coming off from a significant selloff but are unlikely harbingers of interim good news.

Figure 4: PSE: Local Investors: Declining volume but Market drivers

Nonetheless, not everything we see is bad. One thing which surprised us much was the way local investors have been able to engineer a massive rally in the face of foreign selling.

While we have seen intermittent activities led by local investors in the past, the recent streak of gains coupled with its attendant intensity was even more remarkable.

Local investors in the past have been seen driving second and third tier issues, but from the lows of August 17^th, local investors were able to push both index issues and the broader market to garner a 15% gains for two weeks! A first in the present cycle, amazing!

Figure 5: stockcharts.com: Emergent signs of divergences?

Further we saw some seminal signs of DIVERGENCES last week, see figure 5, where the US markets fell hard but the Phisix fell below in degree relative to the US markets (used to be that Phisix would move about 2-3x the performance of the US markets or “Beta”). While the US markets fell Thursday, instead the Phisix moved higher!

This shows how local investors have gradually imbued of the significance of the markets, which in my view is part and parcel for any unfolding bullish cycle.

Anyway we have been long term bulls over the prospects of the Philippine financial markets. And given that a depression is less likely a scenario to unfold, the future actions by the US Federal Reserve will benefit the local markets by establishing a complete divergence or possible decoupling. The flood of money unleashed by the Fed should likely boost the “strong links” in the global financial markets, which this time should be…Asia!

One of our favorite analyst Mr. Louis Gave of Gavekal Research deals with such an outlook (highlight mine)…

``During the Asian crisis, the nadir of the markets involved a number of policy-related events - the Hong Kong government's intervention in its domestic equity market, the bailout of LTCM by a Fed-organized consortium, central bank rate cuts, etc. The central banks took their time in acting (the Asian Crisis started in July 1997, and the rescue did not come until October 1998), since the balance sheets of the Western World's banks did not look threatened. However, once bank shares started collapsing, central banks were quick to act…

`` After the Asian crisis, the extra liquidity injected into the system went into the technology sector, and then into housing (which, at the time, offered strong fundamentals). In the late 1990s, these were the "strong links" in the global financial system. Ironically, 10 years to the day after the Asian crisis, Asia has now become the strong link in the global system. To put it another way, money in Asia to this day is still cheap and plentiful. Following the Fed rate cuts and liquidity injections, money will be even cheaper and even more plentiful. As we see it, this can only have a positive impact on asset prices around the region…

`` The Western central banks' cuts in interest rates and injections of liquidity will force Asian policymakers to make a choice. Will they:

`` Allow their currencies to appreciate against Western World currencies? If this happens, it will mark the final unraveling of the effects of the Asian Crisis, and Asian countries should see the same kind of consumption boom which the Western World experienced between 1997 and 2007.

`` Continue to maintain their currencies at an artificially low level against Western World currencies? To do this, Asian policymakers will have little choice but to print massive amounts of money and run the risk of domestic inflation.

``Either way, it seems to us that investors in Asian assets are today sitting in a very comfortable position. Either, we will see massive currency appreciation and a boom in domestic consumption, or we will witness large liquidity injections which almost ipso facto guarantee a sharp rise in asset prices.”

Short term uncertainty. But long term gains. The Phisix 10,000 in the horizon!