The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological—Howard Marks
In this short issue:
2021 PSEi 30 PER at 1996 Levels! Annual Financial Performance of PSEi 30: Debt Outsprints Even Revenues
I. PSEi 30 Under the Shadows of Stagflation
II. PSEi 30 PER Still at 1996 Levels!
III. In 2021, Non-Financial Debt Outsprinted the PSEi 30’s Net Income!
IV. PSEi 30: 2021 Financial Performance By Industry and By Company
V. Share of Debt to GDP Outsprints Share of Revenues! S. Korea and Philippines Lead Rise in Weekly CDS
VI. PSEi 30: V-Shape Recoveries and the Struggle for Survival; BSP as the Wildcard
2021 PSEi 30 PER at 1996 Levels! Annual Financial Performance of PSEi 30: Debt Outsprints Even Revenues
I. PSEi 30 Under the Shadows of Stagflation
The headline index flew by 5.76% this week to nearly recover all its losses during the meltdown in the previous week.
Following a fresh 9-month low, the hopefuls see this as a sign of consolidation before a meaningful upward ascent.
The idea of the consensus is that the PSEi 30 represents the "market" even when a few issues dominate the market cap weighting of its basket. Barely has there been any discourse on why this has occurred and its causal relationship with intensifying mark-the-close activities.
Nevertheless, with zooming interest rates and signs of a developing liquidity crunch, the idea of a comeback propounded by the bulls may seem doubtful.
Of course, that condition holds unless the BSP indulges in a hypertrophied expansion of its balance sheet to finance public deficits and rescue the banking system anew.
But even then, stocks are unlikely to zoom in general. Only issues that benefit from surging inflation are candidates for expanded reservation demand from investors.
In the meantime, domestic equities are unlikely to stage a masterful revival given their current conditions.
II. PSEi 30 PER Still at 1996 Levels!
First of all, the PSEi 30 remains vastly overpriced.
Figure 1
The BSP-PSE updated its Price Earning Ratio (PER) for April.
While yes, the eps grew 11.52% YoY, in peso terms, the % change was insignificant on a Month-on-Month basis.
Interestingly, despite the so-called 1Q 2022 GDP boom, the eps appears to be plateauing.
As it stands, April’s PER was nestled at 21.21 or still at 1996 levels.
Well, yes, the PER is below the 1996 high of 28. But no, it remains significantly above the 26.4-year average of 17.04.
Secondly, it is unclear what serves as a basis for its calculation.
Outside the annual performance, perhaps the PSE calculates the PER based on the latest available quarterly data published by the member firms.
We can further assume too that members of a specific period comprise how it generates the PER.
III. In 2021, Non-Financial Debt Outsprinted the PSEi 30’s Net Income!
Since the PSE published the annual reports only in the last two weeks, we assume that the denominator will reflect the actual results soon.
The bulls are likely to find disappointment in the annual financial performance of the PSEi 30.
As usual, debt represents the primary driver for members of the PSEi 30.
While the non-financial debt grew by 7.56%, coming from a high base, it gained Php 336.5 billion to Php 4.787 trillion. Secondly, this group consists of 26 members.
Meanwhile, while revenues for the PSEi 30 jumped 12.85%, it grew by Php 523.2 billion to Php 4.596 trillion.
Lastly, net income likewise spiked by 54.4%, or a net Php 206.179 billion.
The point is: in peso, the acquired debt of the PSEi 30 non-financials outsprinted the net income growth of the 30 firms by 1.63 times in 2021
IV. PSEi 30: 2021 Financial Performance By Industry and By Company
Figure/Table 2
By sector, debt grew fastest in the service sector (20.41%).
In the meantime, the industrial sector (101.02%) clocked the fastest net income growth while the holding sector registered the highest revenue growth rate (19.37%).
By company, while Meralco posted the fastest growth rate, San Miguel Corporation recorded the most debt growth in peso. The latter's debt has breached the Php 1 Trillion level!
See San Miguel’s Debt Breached an Unprecedented Php 1 TRILLION in 2021!, May 1, 2022
In 2021, JGS registered a 2,602% spike in net income. But SMC again delivered the most in peso expansion (Php 26.280 billion).
Aboitiz Power scored the swiftest growth rate in revenues, but again San Miguel checked in the most gains in peso (Php 215.396 billion).
So what would be the PER of Friday’s closing of the PSEi 30 at 6,746.33?
Figure/Table 3
Based on the collective 17Q disclosures of member firms, the average PER was at 25.45!
V. Share of Debt to GDP Outsprints Share of Revenues! S. Korea and Philippines Lead Rise in Weekly CDS
In 2021, a great boom occurred in debt. But the surge in revenues and income was primarily a product of the low-base effect.
As a share of headline GDP, aggregate debt stunningly continues to outclass total sales or revenues!
The majestic outperformance of debt spotlights the mounting risks from several aspects of the financial and economic sphere. These include overvaluation, overleveraging, concentration, credit, inflation, interest, market and more.
The scale of revenues and debt also reveals how the elites control the political economy!
Some caveats on the data. The calculation of the above is predicated on the members of that period. Data used are from the original publication and do not include restatements.
Figure 4
And speaking of risks, South Korea and the Philippines posted the highest % weekly gains in Senior 5-year Credit Default Swaps, based on ADB data.
But of course, none of these matters when the consensus is out there to sell something.
And none of them will also say the volume is one of the prerequisites of a healthy bull market. Unadulterated pricing to reflect genuine demand and supply is also a sine qua non.
VI. PSEi 30: V-Shape Recoveries and the Struggle for Survival; BSP as the Wildcard
Last week I wrote,
The benchmark PSEi 30 plummeted by 5.63% this week, the largest in 2022 and the second sharpest fall since the week of January 29, 2021.
See Has Meltdown of the PSEi and Treasury Markets Been Election-Related? Q1 2022 8.3% GDP: Low Base-Effect, Election Spending Financed Consumer Boom May 15, 2022
Figure 5
Same as last week, following a 6.15% crash on January 29th, 2021, the PSEi 30 almost recovered its losses with a 6.15% surge!
The V-shape rally, like today, occurred with an average daily volume of Php 9.97 billion compared to the Php 7.659 billion this week.
Aside from volume, market internals was stronger on February 5th, 2021: advancing issues dominated by 204 compared to 177 this week.
Unfortunately, the 2021 episode shows that the PSEi 30 not only surrendered its swift gains but also fathomed a lower low than the weekly selloff.
Of course, one of the imposing V-shaped recoveries, which proved to be a pivotal top, was in 2008.
Can this rebound defy the recent pattern?
The BSP may instruct and fund institutions to prop the index higher for political purposes (fight asset deflation and/or pre-inaugural ceremonies for the national positions).
So anything can happen.
Despite it, we should expect the domestic equity markets to operate in a survival mode.
Yours in liberty,
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