PHILEQUITY CORNER: TRIPLE WHAMMY FOR THE PESO AND THE MARKET
MANILA, June 28, 2005 (STAR) PHILEQUITY CORNER By Ignacio B. Gimenez - The combination of high oil prices, a relatively strong US dollar and domestic political tensions present a triple whammy for the peso & the stock market. These factors have temporarily overshadowed the improving domestic macro picture and the progress being achieved with regard to fiscal reforms.
Oil prices tested the $60/barrel last week driven by supply concerns of escalating US and Chinese demand in the midst of capacity tightness in crude production and refineries. Talk of several refinery snags in California fueled fears of supply disruptions at the start of the high-demand summer season.
Also contributing to the strong move in oil prices were comments from Fed Chairman Allan Greenspan advising against a trade war with China amid rising calls for protectionism. These comments assured the traders that the US will not do anything drastic to curb the engine of global growth. China consumes an average of 2.46 million barrels of oil a day or 8.3 percent higher than a year ago.
Higher oil prices have rekindled fears of energy-related inflation flaring up and slowing economic activity. As a result, markets closed lower last week with the Philippine Composite Index (Phisix) closing at 1,947, down 3.2 percent for the week. In the US, Dow Jones Industrial Average (DJIA) was down 3.1 percent for the week, its biggest decline in two months.
US dollar strength
The US dollar hit a 10-month high against the euro last Friday, dipping as low as $1.1984, the lowest level since August 2004. Strong US economic data and the outlook for continued Fed tightening have contributed to the dollar strength in recent weeks. The Fed is expected to increase rates further by 25 basis points after a two-day meeting this week which should take rates to 3.5 percent from just one percent a year ago.
Troubles in the EURO zone are also favorable to the US dollar. Concerns of a break-up of European economic and monetary union have been raised in recent weeks following the French and Dutch "no" votes on the European Union constitution and the failure of the EU leaders to settle on a long-term budget. Meanwhile, political pressure has mounted on European Central Bank officials to cut its rates (currently at two percent) in order to revive the regionís struggling economy. The widening interest rate differentials between the US and the EURO zone is the major factor for the recent dollar rally despite long-term concerns over the USí twin deficits.
Political instability continues to take the limelight away from improving domestic fundamentals. Street protests and media coverage of Congress sessions investigating into the alleged jueteng payoffs and wiretap recordings involving the first family have definitely affected the forex and stock markets. The peso is currently at five-month lows and is attempting to test the P56:$1 level.
Putting all these in proper perspective, letís try to see how other currencies and other stock markets fared compared to the peso and the Phisix.
The table below shows that while the peso weakened by 2.8 percent from 54.16 in end-April to 55.65 as of last week, other currencies such as the euro, the pound, the yen, and even the Thail baht declined more ó in other words, the peso may have been just moving in tandem with the rest of the world.
Even in the stock market, we may have been just moving in tandem with rest. So, despite the current political tensions hounding the domestic financial markets, the Phisix is up five percent since end-April and up 6.8 percent year-to-date.
As we have mentioned in previous articles, foreign funds have been flowing into the country since the start of June. Net foreign inflows into Indonesia, Thailand, Taiwan and Korea over the same period have been positive as well.
While we have no way of quantifying the relative importance of these inflows compared to the rising political risk, all we can say is that the Philippines did not fare any worse than its neighbors.
Interestingly, parallel political events like that of the Philippines have transpired in other parts of the globe. In Brazil, Lula da Silvaís ruling party was accused in early June of bribing lawmakers to pass its own legislative agenda. The "cash-for-votes" allegations resulted in televised Congressional hearings whose national audience was said to rival those of Brazilís popular soap operas ó much like here in the Philippines. In the same way, Brazilís stock market fell for several days when the news broke, but later recovered. Under Lulaís presidency, economic policies have prevented inflation, and Brazilís currency, the real, reached its strongest level in over three years.
In Canada, a similar "cash-for-favors" accusation rocked the ruling Liberal party. The Liberals were accused of granting government contracts in exchange for kickbacks. An official inquiry produced testimony of the existence of a slush fund, including kickbacks, payoffs and payroll padding that consumed more than a third of a $200-million federal ad campaign program in Quebec. During the height of the controversy in March-April, the stock market and the Canadian dollar both tumbled to its lowest levels for the year.
As of late, fundamentals have regained its grip on the market. The Canadian dollar reached a three-month high against the US dollar last week, while Canadian stocks are trading at five-year highs. Canada is currently running trade and budget surpluses.
Going back to the Philippines case, we donít know how succeeding events will play out. But in the long-run, Philequity believes that market fundamentals will prevail over political noise as it usually does. Meanwhile, we continue to expect increased market volatility in the short term as long as these political uncertainties linger. Further declines, however, are viewed as opportunities for value investors to position for the long haul. We continue to like the banking sector due to the possibility of M&A plays and the property sector due to the asset reflation angle.
Internet portal Yehey.com launched its Yehey!Finance channel last week at the EDSA Shangri-La. Yehey!Finance provides real-time stock market information, company financials, corporate and economic news, archived Phil. Stock Exchange disclosures, SEC filings, opinion columns, message boards, etc. Investors who require real-time monitoring should check the site out at www.yehey.com. Aside from the usual bid-ask page, it provides level-2 quotes showing buyers and sellers, volume at price and time & sales data. The site also provides ticker tape data and a charting facility.
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Reported by: Sol Jose Vanzi
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