Is the Bull Run Over for Philippine Stocks?

Facts:

The Philippine stocks index fell by 15.69% since reaching an intraday high of 7,403.65 last May 15, 2013.

Last Thurday's trade marked the single biggest drop in PSEi since the global financial crisis in October 2008 when it fell by 6.75%.

The Philippine index recorded its highest return for the year when it closed at 7,392.20 last May 15, 27.17% higher from its year-end close. The market has since declined by 15.56% as of June 14 close.

The yearly gain for PSEi as of Friday is at 7.39%.

Bull Market exists when there is a presence of "optimism, investor confidence, and expectations that strong results will continue."

Bear Market is a condition wherein "prices of securities are falling and widespread pessimism causes the negative sentiment to be self-sustaining". The standard measure uses 20% of advance or decline rally.

Although the current sentiment is negative, we have not yet met 20% decline to warrant that we are already in a bear market. PSEi will enter into a bull market once it crosses below 5,913.76, a 20% decline from its record close.

What Fueled the Decline?

The Philippines posted an impressive economic growth of 7.8% for the first quarter of 2013. In general, the listed companies in the index has sustained their growth. The common question for every investors mind: What went wrong?

If we have to nitpick, the mining sector continues to disappoint, perhaps adding to the burden of government rules on obtaining permits and the incoming rainy season traditionally decreasing production outputs. Most analysts agree that what drove the Philippine stocks to plummet were more on the external factors. Foreign Portfolio Investments, or sometimes called "Hot Money" due to the ease in which investors can pull out their investments, have left the country and most likely went to US amid signs that their economy is on the mend.
Without these investments to boost the stocks prices, there would be massive selloffs as we have already experienced.

This is where we shouldn't let panic set in. While it is true that we are the mercy of the wealthy foreign investors, we also have to understand that the market is going through a cycle. The price of stock has become too expensive compared to other investments and fund managers are simply realigning their investments to optimize returns. The sharp decline should be viewed as an opportunity to buy as the fundamentals still remain sound.

Should you cut your losses or wait until the market goes back up? Should you keep liquid with cash or stay invested in stocks? Your investing strategy is your key to succeed in a volatile market. Timing is not as important if you stick with your plan, because even in a declining market, there is always an opportunity to earn.

The SM Group Merger

Last May 31, the board of directors of SM Investment Corp (SMIC) SM Prime Holdins, Inc. (SM Prime) announced the merger of its property holdings.

SM Development Corp and Highlands Prime Inc. will be acquired by SM Prime via share swap. SM Land and SM Prime will then be merged, with SM Prime as the surviving entity.

According to reports, the consolidation will bring the market capitalization of SM Prime, the surviving entity, to around P591 billion. The move allows SM Prime to surpass Ayala Land as the biggest listed property firm.

from rappler.com

Effect on Stocks

Based on May 30 closing prices, one SMDC share is valued at .405 SMPH share. Given that the offer price is at .472, there is a potential upside of .067 or 16.5%.

One HP share is valued at .135 of SMPH share based on last trading price. At an offer price of .135, the potential upside is .0022 or 2%.

What will Happen?

Given the bearish condition of the stocks market, we still believe that the merger news is too big to ignore. SMDC offers the best upside among the three listed companies and it will likely rise come opening bell. Even if it goes back at 8.50 and assuming SMPH are unchanged at 19.50, it will still give an upside of 8.28%.