Is the Philippine Stock Market Cheap or Expensive?


cheap or expensive

In the first few weeks of 2013, we have witnessed the record breaking performance of the Philippine Stock Exchange’s main index. Now everyone is wondering, what will happen next?
Is it a good time to invest?

Cheap or expensive

A lot of people are saying that it is no longer a good time to invest because stock prices have gone up and are therefore expensive. However, if you base your investing decisions on the stock price alone, you will never go forward. Imagine if the stock prices are high just like today, you will not invest because you think it’s expensive. On the other hand if it is going down, won’t you be scared to invest too?

That is why looking at the stock price alone will not tell you much. Sadly, a lot of people are speculating and talking about the things that they know little of. They are saying that the stock market is expensive. Based on what? Is “Company X” more expensive compared to its peers from the same industry? Or it is just “expensive” in general?

There is a growing sentiment that it is better to invest in other countries where stock markets are “undervalued”. I bet the amount of money that you will use to invest in a foreign “cheaper” stock market will cost you more. In order to invest in the stock market abroad, you need to open a local bank account, know their rules, their government and economy. You also need to have a broker in that country. You might as well just invest in your own country.

Having said these things, how can we truly value the stocks in the Philippine Stock Exchange nowadays? Are they really expensive? How can we make an intelligent choice?

This is where fundamental analysis comes into play. Fundamental Analysis is a method of valuing stocks by attempting to discover a company’s fair value.

Through fundamental analysis, you try to discern what a company’s intrinsic or fair value is. It will help you determine which stock is more expensive than the others. This way, you can base your decisions on thorough research and actual data rather than market tips, rumors, and innuendo.

If you compare the Price to Earnings (P/E) ratios of several of the biggest and best companies of our country from 2011 up to today, you will see that they are actually dropping. What does this mean? It means that if we look at how much we have to pay for one peso of earnings today, companies are actually cheaper compared to the past few years. Yes, the actual stock price may be higher than before but since companies make more money today than they did before, you don’t have to pay as much to get those earnings.

Factors such as a better economy, recent mergers and acquisitions, new products, additional branches etc result in bigger and more profitable companies. This in turn results to higher valuations and higher stock prices for the businesses.

Remember, next time someone tells you that the market is “expensive”, ask them “Based on what?”

Aya Laraya

public seminarofw


Comments

  1. Alex says

    Expensive… based on their target prices derived from fundamental analysis. P/E ratio is not a reliable indicator.

  2. says

    Well said.

    The good thing I see about this is that at least a lot of people know enough to be scared of high stock prices. In the U.S. great depression, they just figured the party will keep going, hence the long hard fall.

    But high prices aren’t a reason to not invest. Long-term peso cost averaging can easily remedy that.

  3. Francisco says

    You say: “If you compare the Price to Earnings (P/E) ratios of several of the biggest and best companies of our country from 2011 up to today, you will see that they are actually dropping.”

    I agree that this is a very important metric.

    Is there a unified website where one can get Price to Earnings information for the main companies traded in the PSE? I imagine that one could get them by accessing individual company reports, but I am looking for a general source of up to date information for at least for the major companies traded (e.g. PLDT, Ayala, SM etc).

    Thanks

      • Francisco says

        Does anyone have a view about this interesting article.

        http://www.interaksyon.com/business/50086/nomura-says-philippine-stock-market-has-run-its-course

        In principle, it is always possible to identify good fundamentals for individual stocks. Nevertheless, I would like to know the opinion of Mr. Laraya and of participants in this forum regarding Nomura’s overall negative assessment of the present status of the Philippine stock market. It goes at the heart of the issues presented by the above article.

        • says

          Hi,

          First, that article is over a month old and several key events have taken place since then. The U.S. averted its financial cliff (for now) and fixed income rates have continued to fall. Both of these events have caused more inflows into the local market and led to further increases in the index.

          Second, their concerns are valid and even for me, this continued rise IS worrying. However, each person has to choose whether to look at a glass as half-full or half-empty. Using their metrics, YES the Philippines can be considered expensive. However, if you are a LOCAL investor, what are your realistic options at this point in time? You either participate in the market (directly or indirectly) or accept falling fixed income returns. It’s a tough position to be in. Now, if you are a FOREIGN investor, then the situation is different since you have access to markets and products that locals do not.

          That being said, the biggest x-factor now would be whether or not we get an investment upgrade or not. If we do, then fixed income rates will most likely fall even more — thereby potentially pushing even more money into the market. Until then, I would just sit back and wait for the market to hit my exit points. :D

          • Francisco says

            Aya, Now that Fitch has made upgraded the Philippines, what would you say is the next likely value determining milestone investors should be looking out for?

  4. Iris says

    Hi Mr. Aya! Can you please differentiate index fund and mutal fund? And also what other paper assets can you suggest aside from stock market. I’m currently enrolled in citisec and started investing last Sept. I am also a Truly Rich Club member and it also helped me a lot in investing in the stock market.

    • says

      Hi Iris, I’ll try to give my answer to your question.

      Mutual fund is when people pool their money and a fund manager (professional, skilled, experienced) does the work of researching the market and investing the money. They are very similar to UITFs. Additionally there are many types of funds in a mutual fund. The four basic are: money market (time deposits, Special deposit accounts), Bond funds (government or corporate bonds), Balanced Funds (bonds plus stocks), and Equity Funds (stocks).

      Under Equity Funds there are many types as well, depending on the fund’s objective. And Index fund is a type of equity fund that aims to match the stock market index (like the Philippine Stock Exchange Index) by buying and holding all the stocks listed on that index.

      It’s main benefit is that you’re not likely to under-perform vs the market. Conversely, it is also unlikely to outperform the market. It should have lower fees as there is nothing to really research and trading only happens when the index changes.

  5. says

    “Is the Philippine Stock Market Cheap or Expensive?
    ” in reality got me simply hooked on ur page! I actuallywill probably wind up being back again much more often.
    Thanks ,Tammara

  6. Wilson says

    Hi Aya,

    I just wanted to know how much would be the most common investment in the stock market. I know in mutual funds, some would have P5,000 as the minimum and P1,000 additional minimum investment.

    Thank you.

    • says

      If i may answer, @wilson, most online stock trading companies require a minimum initial amount of P5,000. Succeeding investments depend on your choice of stocks. Other bank-affiliated brokers such as BPI-Trade and FirstMetroSec require no initial minimum investment as long as you have funds in your savings accounts with BPI or Metrobank, respectively.

      • Wilson says

        Appreciate the reply Burn. I also went to UP and signed up for Stock Market 101. I learn a lot from people like you who give their insights about trading.

  7. says

    Hello there, You’ve done a fantastic job. I will certainly digg it and personally suggest to my friends. I’m confident they’ll be benefited from this site.

  8. Leigh says

    hi mr. aya. ask ko lng po kung sakaling mag-invest ako ng 5k, tapos may broker pa, bale magkano po ang expense ko? di ba may additional expenses pa bukod sa investment na Php5,000. tama po ba? saka pwede po bang kayo na lang ang broker ko? gustong-gusto ko na po kasing matutunan at masimulan mag-invest hanggang single pa ko. thank you po.

  9. says

    Hey There. I found your blog using msn. This is a very well wrutten article.
    I’ll be sure to bookmark it aand come back to read more of your useful info.
    Thanks for thhe post. I will definitely return.

Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *