A timely Valentine’s gift for PSEi

If you didn’t get enough action last V-Friday, it was probably because you were looking for it in the wrong place.

Okay, so you wore that tacky red shirt and carried half-a-dozen roses around like a Boracay beach peddler, hoping for some intimate after-dinner peck in the condo elevator from your Deniece ka-look-a-like date, only to get cold shoulders from your lady too busy on her smartphone getting updates from Bloomberg.

Instead, of her usual “Cge, punta sa condo ko” invite, what you heard instead was a rather unusual, “Pahiram nga ng wifi mo. Oh my bulalo, up na naman EPHE?”

If you were truly listening to your CFA-certified girlfriend’s financial market musings, you would have realized that Philippine ETFs have actually led most other emerging markets (EMs) on the uptrend since EMs had taken a serious “taper” beating.

Last Friday, was another exceptionally sweet 1.12% rise, bringing $EPHE to $32.37, a nice Valentine’s gift to our local PSE investors and confirming once again the breakout (see chart below) from $EPHE’s consistently downward sloping ceiling since May of 2013.

What this implies could be very big: the EM crisis is finally getting behind us, especially for the more fundamentally sound EMs. And who is the better judge, if not investors themselves.

Hence, the $EPHE chart above is an exciting one and complements of Roy Reyes, one of my co-founders in Traders Apprentice Pilipinas (TAP) and Chief Chartist.

In case it escaped you, TAP is one of the fastest-growing Facebook groups for Filipinos here and abroad, and is an open group that allows the online sharing of stock market insights and analysis amongst its members.

Since we started 6 months ago, to my surprise TAP’s FB membership has grown to about 6,500, reflecting the pinoy’s huge demand for tested wealth creation strategies and trading tools.

But unlike other FB groups equally promoting “financial literacy,” TAP believes that getting financially fit is still very different from getting wealthy. The latter is a far more elusive matter and requires consistent mentoring and analysis by proven wealth creators, which is TAP’s unique mission.

Back to my point. The macro story of the Philippines is an exciting one and is anchored on a “recession-proof” OFW remittance waterfall that is regularly cascading $23 billion per year into the local economy and is primarily “unlevered” cash flows. This OFW-anchored dollar inflows, plus a growing service-based outsourcing industry, are what’s unique about our Philippine model. We are so unlike the mega-factories in China and Korea where production can only happen when bankrolled by considerable financial leveraged or debt.

In the Philippines, because we have a serviced-based model, except for mega malls, and power plants to power the mega malls, our consumption-driven growth story does not require huge capital, and is therefore basically “unlevered” cash flows coming in. Hence it’s no surprise that in one chart recently shared in Twitter universe (see chart at the right), the Philippines again outshines them all in terms of funding capacity and support.

So in terms of resiliency, while other EMs had to deal with considerable capital flight and debt service cover, it is no surprise that the Philippines continued to expand at the fastest pace ever, despite major natural calamities.

Philippine GDP growth was 7.2% in 2013 (6.8% in 2012). This has placed us as the 2nd-fastest growing major economy in Asia after China, which grew at 7.7% last year.

On the back of this macroeconomic story, $EPHE, an exchange traded fund launched in 2010, is now clearly up trending and moving away from its recent downward trajectory. This can only be good news for the PSEi for the coming weeks ahead. $EPHE is in more than 40 securities but the bulk of it, almost 57%, is invested in top Philippine blue chips. $ALI (8.4%), $BDO (6.56%) and $TEL (6.49%) make up the top 3 holdings in $EPHE. Now that $EPHE has given us a heads up on which general direction the PSEi is likely to move, the next practical trading question is where to position within the PSEi.

On this note, if you remember my last Rappler article “PSEi and that funny inverted ‘Y’ formation” late last year, I did say that we are now moving towards Wave 5, which is a considerable up trend, if not the briskest up trending impulse wave in Elliot Wave theory. Where we are in this “Y’ formation, Wave 5 is where exactly that black arrow is pointed below.

Based on PSEi’s recurring history (i.e. ‘Y’ formations in red ink), we either double top at Wave 3’s peak of 7,400 (visited last May 2013), or go even higher to 8,500 to 10,000 PSEi. However, on this upcoming Wave 5, not all stocks go up proportionately. In fact, so unlike Wave3 “where everybody buys everything” else and all stocks go up from blue chips, banks, second-liners, etc., this Wave 5 would be on more “specific plays.”

True to form, some of the sectors I mentioned in my last articles as the ones likely to lead a Wave 5 rally actually did much better than the index since the start of the year. These are specific plays or “greed stocks,” such as expansive property players like $MEG, specifi gaming or mining plays, etc. So far, these have also been the leaders.

During our last TAP class, our guest speaker was Wealth Securities Trader Ms. Nikki Yu. She also agrees that their investment theme for 2014 would be “resilience and recovery” for the PSEi. For chartists, Wave 5 is certainly an exciting recovery, albeit most likely also the last major market uptrend since our bull run started in 2009.

In particular, I remain most bullish on Megaworld ($MEG). For fear of being accused of hyping the stock, I wish to disclose that I do have some investments in this property company. But the historical charts also speak for itself so there is almost no need for me to say much. Below is $MEG vs. $ALI and $FLI based on 5year charts.

Assuming an EM situation occurs where there is some level of decoupling from Turkey, or Argentina within the foreign investor community, that could be the basis for the PSEi to break its 20year pattern of always double topping on Waves 3, 4, and 5. If this happens, then a Wave 5 peak beyond 7,500 is possible.

As a trader I must be most cautious. But as a poker strategist, I also know that what didn’t exactly kill us during the last 6 months of 2013, is also likely to make us stronger, if not foolishly stronger in the coming months ahead.

We keep an open mind, ready to call, raise of go all-in with our bet if and when the situation goes in our favor. – Rappler.com

The author is Managing Director for Corporate Finance of the Center for Global Best Practices (CGBP). He was connected with PNB Capital & Investment Corp. as President & CEO and with Punongbayan & Arraulo, where he set up the first P&A/Ernst & Young Corporate Finance practice in the Philippines in 2001. Tony is active on Twitter for stock market newbies: @Tony88981.