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I'm Trying to Understand How the PSEi is Moving Sideways

Business World Online

I'm currently invested in stocks via equity funds. Personally, I find trying to DIY stocks to be easier said than done. Though, there's no harm in learning it yourself. Either way, Warren Buffett recommends cost averaging into an index as an alternative (read the article here). Though, I have zero intention to do day trading because it's absolutely just gambling. Charlie Munger would wisely tell the young it's but a speculative orgy. 

From the Philippine Star, I read about how stocks are moving sideways. This would be an excerpt of what's really going on:

MANILA, Philippines — Stocks will continue to move sideways this week as investors weigh the impact of sticky inflation and rising interest rates on corporate earnings.

The local equities market sustained its downward move on the back of a busy week capped by the Bangko Sentral ng Pilipinas’  50-basis-point rate hike.

The BSP raised its policy interest rate by half a percentage point, bringing the overnight reverse repurchase facility to six percent, the  highest in nearly 16 years or since the 7.5 percent rate in May 2007.

This is another thing I felt has never been taught in school, right? Now, it's time for me to learn two causes of the sideway movement. There is sticky inflation. There are rising interest rates on corporate earnings. 

Defining sticky inflation 

From the Economics Help website, this is how sticky inflation can be defined:
Sticky inflation is an undesirable economic situation where there is a combination of stubbornly high inflation, (and often stagnant growth). Sticky inflation is often associated with cost-push factors, i.e. factors which cause a rise in the inflation rate but also lead to lower spending and economic growth.

Sticky inflation is also sometimes known as Stagflation – Rising prices, but stagnating economy. The UK experienced stagflation back in the 1970s as a result of cost-push inflation(higher oil prices and rising wages).

What would be the causes of sticky inflation or stagflation? These are the factors defined by Economics Help:

Cost-Push Factors. Upward pressure on inflation could come from higher fuel prices, higher food prices and some supply constraints in key sectors. If inflation does remain above the government’s target of 2% it will limit the capacity for the MPC to cut interest rates. However, these cost-push factors can occur during low growth, therefore, the MPC may be reluctant to increase interest rates to reduce inflation because they are worried about growth

Expectations. Inflation is often sticky and difficult to reduce when people expect higher inflation. When people expect higher inflation, it can be more difficult to reduce it. (e.g. workers bargain for higher wages in anticipation of inflation.

Wage Push Inflation. If labour is able to push for higher wages, despite lower growth, then we could get a combination of rising inflation, but slow growth. This is especially a problem if a country is part of the single currency. If wages rise, they become uncompetitive leading to lower demand. Therefore there is an unwelcome combination of rising prices, but lower growth. If countries were not in a single currency, the uncompetitiveness would lead to a depreciation in the exchange rate to restore competitiveness and increase demand.

Temporary Inflation. Sticky inflation may occur due to a rise in tax rates (e.g. VAT) this increases the headline inflation rate, but the higher taxes reduce living standards leading to lower growth. Therefore, it is important to look at different measures of inflation which strip away temporary factors such as higher taxes. 

Reading the article makes me say, "I just can't take IBON Foundation seriously." (read why here) The same can go for people who still demand increased salary rates, lower prices of goods, and PHP 10,000 cash handouts for people. The three factors are bound to lead to more inflation because pushing for higher wages despite lower growth leads to inflation, The higher fuel prices can also lead to higher food prices. We need to also think about measures on imports and increasing domestic food supply. We also seldom need to decrease tax rates if necessary. I don't see how decreased tax rates are "anti-poor" based on this data. 

Defining interest rates of corporate earnings

Investopedia provides the following understanding of earnings:
Earnings are the profit that a company produces in a specific period, usually defined as a quarter or a year. After the end of each quarter, analysts wait for the earnings of the companies they follow to be released. Earnings are studied because they represent a direct link to company performance.

Earnings that deviate from the expectations of the analysts that follow that stock can have a great impact on the stock's price, at least in the short term. For instance, if analysts on average estimate that earnings will be $1 per share and they come in at $0.80 per share, the price of the stock is likely to fall on that "earnings miss."

A company that beats analysts' earnings estimates is looked on favorably by investors. A company that consistently misses earnings estimates may be considered an unattractive and risky investment, or needs to improve its financial forecasting abilities for better earnings guidance but its stock price gets hurt in the process. 

We also take a look at these three figures to measure profitability:

Earnings per Share

Earnings per share (EPS) is a commonly cited ratio used to show the company's profitability on a per-share basis. It is calculated by dividing the company's total earnings by the number of shares outstanding.

Price-to-Earnings

Earnings are also used to determine a key indicator known as the price-to-earnings (P/E) ratio.

The price-to-earnings ratio, calculated as share price divided by earnings per share, is used by investors and analysts to compare the relative values of companies in the same industry or sector.

The stock of a company with a high P/E ratio relative to its industry peers may be considered overvalued. A company with a low price compared with its earnings might appear to be undervalued.

Earnings Yield

The earnings yield, or the earnings per share for the most recent 12-month period divided by the current market price per share, is another way of measuring earnings. It is in fact simply the inverse of the P/E ratio. 

Obviously, any rising interest means that the company has to pay higher for shares in corporate earnings. One of the leading factors that led to the decrease was profit taking before key data, according to Business World. The same could go for the corporate earnings interest, which is something that the corporation is required to pay. If the interest rate is higher then the company must pay out more. 

References

Websites

"Earnings: Company Earnings Defined, With Example of Measurements" by Alicia Tuovilla, reviewed by Khadijah Khartit, fact-checked by Timothy Li

"Sticky Inflation" by Tejvan Pettinger ((30 December 2007)

"Stocks seen to move sideways" by Iris Gonzales (Februray 20, 2023)
https://www.philstar.com/business/2023/02/20/2246146/stocks-seen-move-sideways

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