Rising risk and opportunity to buy the market
The stock market has not been performing well lately. For the year-to-date period, the Philippine Stock Exchange Index (PSEi) is down 5.7 percent. This is not surprising given the abundance of bad news and risk factors materializing the past few weeks.
Two weeks ago, the Philippine Statistics Authority announced that fourth quarter gross domestic product (GDP) grew by 5.2 percent. This was below economists’ median forecast of 5.5 percent. Growth disappointed as the agriculture sector contracted by 1.8 percent while consumer spending growth slipped to only 4.7 percent in the fourth quarter after recovering to 5.2 percent in the third quarter.
Stocks were also sold down heavily during the last week of January as fund managers were in a rush to reduce their positions on most index stocks. This was done to accommodate the addition of AREIT and Chinabank to the PSEi index by the rebalancing deadline. The market’s thin trading volume made matters worse by exaggerating the magnitude of index stocks’ declines.
US stocks also started showing signs of volatility, negatively affecting the performance of global markets including the Philippines. After rising by as much as 4 percent, the S&P 500 is now up by only 2.5 percent for the year-to-date period. The tech-heavy Nasdaq is even more volatile and is now up by only 1.1 percent after rising by as much as 3.8 percent in January.
Recall that tech and power companies fell sharply in January following the launch of Chinese company DeepSeek’s artificial intelligence (AI) model R1. This is because China was able to produce an AI model that matches the performance of OpenAI’s 01 model at less than 10 percent of the cost and with much less energy requirement.
If advanced chips are not required to build successful AI models, it will be difficult for hardware companies such as Nvidia to sustain their strong earnings growth and to justify their lofty valuations. The growth in power demand might also not be as strong as previously expected despite the growing popularity of AI.
Other “Magnificent 7” companies are also being sold off. For example, shares of Alphabet (Google) fell after disclosing weaker-than-expected revenue growth. Meanwhile, Amazon and Microsoft were sold off after both companies said that capacity constraints are preventing them from keeping up with AI demand.
The US market also responded negatively to President Donald Trump’s announcement that he would impose a 25-percent tariff on Mexico and Canada and an additional 10-percent tariff across all Chinese imports effective Feb. 4. Although the market recovered some of its losses after Trump quickly agreed to a 30-day pause in return for concessions on border and crime enforcement with Mexico and Canada, uncertainty remains. This could tame the animal spirits driving US stocks higher.
Nevertheless, we believe that investors should take advantage of the market’s prevailing weakness to buy stocks at much cheaper prices.
Although the Philippines’ fourth quarter GDP growth was disappointing, it was not surprising. This is clearly reflected in the market’s lackluster performance and depressed valuations even before the weaker-than-expected GDP growth numbers were announced.
Moreover, economic growth should improve going forward. Rice prices are already going down and this should lead to lower inflation. Interest rates are also trending lower and should help fuel more investment spending. Finally, 2025 is an election year. Historically, economic growth was stronger during election years because of campaign spending and higher spending on infrastructure projects by candidates running for reelection.
Meanwhile, the steep drop in the market caused by the rebalancing of the PSEi index had nothing to do with stocks’ fundamentals. Because of this, the decline is not expected to persist, benefiting investors who buy stocks while they are temporarily down.
Finally, while Trump is aggressively implementing tariffs as a negotiation tool, the Philippines is not expected to be a priority since our exports account for only 1 percent of the United States’ total imports.
The caveat is investors who buy stocks today need to be prepared to potentially stay invested for a long time. This is because the US market could suffer from a steep correction in the near term given its expensive valuations and the risk that growth could disappoint. Unfortunately, the Philippines always suffers from a contagion even though our market is already very cheap.
Nevertheless, the good news is, many stocks now provide very attractive dividend yields that even exceed bond yields. This makes it easier for equity investors who buy stocks today to stay patient while waiting for prices to rebound.
