Given the relatively small size of the local equities market, oftentimes the prospect of foreign investors selling their shares can be a nerve wracking one, seeing as this tends to be a drag on stock prices.
Despite recent positivity with regard to the inflation report and the prospects of a fed rate cut, the PSEI’s current level of 6,529.43 as of June 8 still translates to a flattish performance of only +2.4% versus a year ago. Much of the index’s relatively mediocre movement has been attributed to the lack of foreign interest, as a net total of $918.16-Mn worth of hot money has exited local equities throughout this time period.
Foreigners keep selling
When taking a deeper look at the PSEI’s constituents, over the past month, foreigners have also maintained a net selling position on 19 out of 30 of the local benchmark’s member companies.
Amidst the seeming lack of interest by foreign investors for Philippine stocks, one has to wonder why this is the case and whether this is even justified. Have earnings been underperforming that of our geographical peers? With regard to the latter, we think that the answer is a resounding “no.”
In 2023, the PSEI’s earnings-per-share (EPS), which is an aggregate measure of the local market’s overall profitability for that year, grew by a solid 15.4%, outpacing the country’s 5.6% gross domestic product by almost threefold. In contrast, our ASEAN peers (Thailand, Vietnam, Indonesia, Malaysia, and Singapore) saw their own EPSs contract by a combined average of 11.3%, with Singapore being the only one outside of the Philippines to record a positive change at a meager 2.1%.
Earnings surprise
Meanwhile, of those 19 index companies that have been seeing foreign selling pressure over the past month, we note that almost all of them were able to post 1Q24 earnings that were either on par or exceeded analysts’ expectations, with only three names underperforming. Q2 earnings figure to be the same for them, with expectations for performances generally ranging from in-line to outperform.
Yet despite these, the PSE remains as one of the more illiquid markets in Asia due to the lack of foreign participation. From this, it becomes clear that there appears to be some disconnect.
As a result, many local players have been left wondering whether they should just park their cash somewhere else while they wait for foreign money to eventually make a sustained return to our shores. In our view though, if one plans to use the stock market to build long-term wealth, then such lulls in foreign participation actually provide an opportunity for local investors to find quality stocks at bargain prices before anyone else.
Sleeping on cheap stocks
Currently, the market’s P/E ratio, which is a common metric used by investors to gauge whether stocks are under/overvalued based on the profits that they generate, has been trading at a historically low 10.4 times, which would therefore indicate that equity prices now are much cheaper versus their historical levels.
When looking across the landscape of listed stocks, one can also see that individual companies have been visibly engaging in efforts to keep profits rolling. For example, in the food and beverage space, JFC has been engaging in acquisitions in order to expand its earnings-generating capacity, while banks like BDO and MBT have been busy increasing their loan volumes in order to keep net interest incomes growing despite the effects of soon-to-be lower interest rates.
Even companies from sectors such as telcos and property which were previously beleaguered by tight monetary policy have been making the necessary adjustments in order to continue growing their bottomlines and cashflows, such as cutting down on costs or readjusting their strategies when it comes to investing in new residential developments.
The real opportunity
In short, what we are trying to say is that foreign activity, while still an important indicator, is not the be-all and end-all when it comes to the difficult art of stock picking. When it comes to assessing potential long-term performance, earnings prospects and an attractive price are still the factors that truly define a stock.
As such, in an asset class that is notorious for its short to medium term volatility, sometimes it is the fluctuations brought about by such offshore flows that can ultimately provide an investor with the opportunity to purchase a fundamentally attractive stock at a bargain price. So, the next time you catch wind of foreign selling on a particular company’s shares, try to think for yourself whether the company’s future earnings prospects warrant such heavy selling on the market. If not, then you could potentially find yourself a long-term keeper at the expense of some unwitting foreign fund out there.
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.
Francis Subido is the senior research analyst at AP Securities.
