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Analysis and Recommendation
Historical data (see graph below) shows that the market typically performs well in the final quarter of the year. Over the past decade, the PSEi has achieved higher 4th quarterly closes in 70% of the years. Given this track record, it’s worth contemplating whether the recent market dip in the third quarter might act as a spring board for another strong finish in the fourth quarter.
Several factors can contribute to an optimistic outlook for the remainder of the year. A key driver could be the anticipated decrease in inflation during the final quarter. The Bangko Sentral ng Pilipinas (BSP) is actively working to stabilize inflation rates, with the aim of reaching its target range by the fourth quarter. Our belief is that headline inflation may drop to 4.5% by the close of 2023.
Furthermore, we may witness the last interest rate hikes, both domestically and internationally, in the same timeframe. Central banks’ decisions to halt rate hikes can wield significant influence over market sentiment. A pause in interest rate increases can translate into more favorable borrowing conditions for businesses and consumers, potentially stimulating economic growth and strengthening stock prices.
Our View: The fourth quarter typically exhibits positive sentiment and heightened buying activity. One standout year, though, was 2016 when the market faced a sharp downturn due to concerns about a rate hike by the US Federal Reserve, which materialized during its December 14, 2016 meeting. Additionally, negative sentiment was fueled by President Duterte’s contentious remarks against the US, a major trading partner for the Philippines.
While October is renowned for its market volatility, November and December often usher in more favorable sentiment and an upward trend. On average, the PSEi has recorded a 3.1% gain and a median gain of 1.6% quarter on quarter. With a 70% success rate, there may be trading opportunities to position for an end-of-year rally.
Notably, index heavyweight stocks such as Ayala Land Inc. (ALI), SM Investments (SM), and SM Prime Holdings (SMPH) are recommended.
It’s also worthwhile to explore other non-index stocks that exhibit a strong correlation with the PSEi, such as Robinsons Land Corp. (RLC), Security Bank Corp (SECB), and SSI Group Inc. (SSI).
Nonetheless, it’s essential to bear in mind that past performance does not guarantee future results, and unforeseen events can disrupt these patterns.
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