In contrast, corporate earnings (as measured by earnings per share) and the broader Philippine economy (as measured by the country’s gross domestic product) both grew by around 49 percent during the same period.
Conventional wisdom says that the share price should reflect the growth in underlying earnings, and this has held true for the most part in the past 20 years.
This relationship between share price and earnings is measured by the price-to-earnings ratio, one of the most commonly used valuation ratios in the investment world.
The market’s price to earrings (P/E) ratio has now sunk to 12.1 times from the 15-year prepandemic median of 16.5 times as a result of the market failing to price in corporate earnings growth.
For further context, it is now even lower than the PSE Index’s P/E ratio of 12.6 times during the global financial crisis of 2008.
As far as we can tell, the divergence between stock valuations and corporate earnings first started to appear in the middle of 2022.
Interestingly, this was around the same time that the Federal Reserve started its aggressive rate hike program in its crusade to beat inflation.
The Fed’s moves caused US bond yields, the benchmark of so-called risk-free returns, to surge to all-time highs. This made it irresistible to investors around the world and lured funds away from emerging markets like ours, thus leaving the local stock market as the dried-out husk of its former self that we see today.
However, we are starting to see green shoots sprouting from the barren landscape.
Share buybacks are picking up steam, with big companies like Ayala Land, Universal Robina, and Aboitiz Equity Ventures taking advantage of low prices to buy back their own shares.
Directors and executives of listed companies are also actively adding to their own positions.
The majority shareholders of companies like Metro Pacific Investments and Premium Leisure have taken this one step further and offered to buy out minority shareholders to take their companies private in the past year.
Mergers and acquisitions are also on the rise, as evidenced by DMCI’s takeover of Cemex Philippines and Meralco’s acquisition of a controlling stake in upstart renewable energy developer SP New Energy.
To sum it all up, stocks are now cheaper than they have ever been and smart money is buying. The question is, when will YOU start to build up your own positions? — Alfred Garcia, AP Securities research head
Financial market recommendations and comments on InsiderPH News belong solely to the analysts and institutions making them. They do not represent buy, sell or hold recommendations of InsiderPH News. Investments held by analysts or institutions may influence their recommendations. Investors should conduct their own research and carefully evaluate all relevant market information before making investment decisions. As always, the past performance of any investment does not guarantee its price appreciation in the future.
