Philippine Markets Newsletter

MONDAY MACRO: The PSEI just dropped 10% in one day… what is its P/E ratio now???

March 16, 2020

The Philippine Stock Exchange index (PSEi) is already down 31% since January 2020, sparking fear and panic among investors. Just last week, in the midst of the coronavirus pandemic, the PSEi fell nearly 10% in one day, its largest drop since October 2008.

Despite the massive decline in equity value, Philippine companies are not yet at risk of defaulting, mostly thanks to the size of their cash flows versus their immediate financial obligations.

This metric should shed light on how a solid credit profile can translate to sustained corporate profitability even when stock prices collapse amid negative investor sentiment.

Philippine Markets Daily:
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A black swan is an unprecedented event beyond people’s control that causes severe outcomes. This term was developed and formalized by Nassim Nicholas Taleb in his book, The Black Swan: The Impact of the Highly Improbable.

According to Taleb, black swan events have three qualities: rarity, huge impact, and retrospective predictability.

In the first quarter of 2020 alone, the Philippines experienced at least two black swan events that caused the PSEi to fall over 30% from its previous highs in November 2019.

The first black swan event was the eruption of the Taal Volcano in January 12, 2020. This resulted in the subsequent displacement of thousands of families in the Cavite and Batangas regions. The eruption caused ashfall to spread all over Metro Manila, forcing the suspension of stock market trading on January 13, 2020.

Many real estate and property developers had interests in this area, having built establishments around the Taal Lake for residents and tourists to enjoy the view of the lake.

The second black swan event is the spread of the novel coronavirus in the Philippines and the sharp increases in confirmed coronavirus disease 2019 (COVID-19) cases in Metro Manila. As the number of confirmed COVID-19-related cases and deaths rose, investors grew weary.

However, fears that the growth of the Philippine economy will be severely impacted by the COVID-19 health crisis are unfounded.

Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno assured the public that the central bank will utilize the monetary tools at its disposal. He goes on to say that even under the worst case scenario, a 6% GDP growth is still possible.

Although it looks like none of us can catch a break with all that has happened in the first three months of the year, investors can take comfort in knowing that Philippine companies have a much stronger balance sheet than you might think.

Philippine banks’ capital adequacy ratio (CAR) are higher than the BSP’s prescribed 10%, which is already higher than the global minimum of 8%. At a 15% CAR, there is still some wiggle room before banks will need to call for the BSP’s assistance.

Philippine companies are also at much better shape in terms of their current ability to cover their obligations in a scenario when no momentary relief is granted to them.

The current aggregate interest coverage ratio for Philippine companies is at 4x. Although it is at its lowest level in the last 10 years, this number is still at a level comfortable enough for firms to continue their operations without defaulting on their loans.

An interest coverage ratio of 1x means that a company is generating the same amount of earnings before interest, taxes, amortization, and pension (EBITAP) to service its interest expense.

Generally, investors require companies to have at least 2x interest coverage ratio. Generating EBITAP that’s double the short-term financial obligations gives investors assurance that the company still has the resources to fund its growth.

This shows that market’s fears about Philippine companies being suddenly crippled because of these black swan events are unfounded. It’s easy to panic about the headlines and the rest of the market’s panic selling, but we’re not seeing any looming credit failures on Philippine banks or corporations.

What we see is a 6% GDP growth that is still attainable for the remainder of the year. Uniform P/E levels are currently at 16x, falling from 24x in just over a month because investors have been selling shares of even the strongest blue-chip companies. The last time P/Es were this low was in 2011, after the 2008 financial crisis spooked investors everywhere.

What we’re seeing now is a knee-jerk reaction to an event that investors have no control over, causing them to flee and cut their losses.

However, as we’ve stressed multiple times, Philippine companies still have healthy fundamental profiles. Unless we see a credit collapse, there is no reason to be jumping on the bandwagon of panic selling at this time.

About the Philippine Market Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim & Joel Litman
Research Director & Chief Investment Strategist
Philippine Markets Daily
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