Technical Side: Benchmarking against the PSEi

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Ever remember how we call the PSEi(Philippine Stock Exchange Index)? We call it the “barometer” of the Philippines economy. It is so-called because it in a way represent most of the sectors of the economy. It is composed of 30 stocks from the different sectors with some guidelines that will in effect nearly represent the economy as a whole.

So being the meter stick why not use it to compare the stocks that you might be investing in.

I got this chart in Bloomberg.com by adding several stocks and using the PSEi to make a comparison.

PSEi chart

source: http://www.bloomberg.com

If you look at the chart one stock clearly deviates from the rest as compared to the PSEi while the rest tracks the same direction of the PSEi. The orange line is the PSEi and the stock that clearly shows a positive upside is MEG. On the other hand ALI follows the PSEi’s movement while RLC seems to go further away from the PSEi in the opposite side.

The ratio that compares how a particular stock reacts to the index movement is called Beta Coefficient or simply Beta(learn more about Beta by clicking here). It compares how volatile a  stock against the benchmark which in the case of the Philippines is the PSEi.

It is important to note that when a stock has a higher beta it means it outperforms the index thus it has higher returns but at the same time higher risk. Low beta stocks are considered stable since any changes in the index will have little effect on the stock.

Looking back at the chart you can see that almost all stock converge or has the same level with the PSEi last November 2013. If you bought MEG at that time until December and held it till May you could have profited big if you sold it today. Such comparison might not be accurate though since a stock’s future price can’t be really predicted but having a general idea how a certain stock reacts to the movement of the index gives you an advantage of knowing when to buy or sell a stock.

Financial Freedom Advocate About the blogger

Louis Delos Angeles is a Certified Public Accountant, blogger behind Investing in Philippines, and author of Investing in Stocks: Preparing for the future small amount at a time. Check him out in Google+ Learn more about Louis and his financial freedom advocacy here.

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