With a series of false starts since the Covid-19 lockdowns and currently anchored at the 6,000 level, looking at the PSE Index (PSEi) can be frustrating, to say the least.

When sentiment is low, the main selling point of any market cheerleader is valuation. Investors, like any collector or shopper, are on the lookout for goods priced less than their true worth.

True worth though, in investor parlance, is intrinsic valuation. In other words, when prices fall significantly, the argument is that the market should viewed as a bargain.

And the reality is the Philippine stock market is ridiculously cheap. The PSEi is trading between 9-10x of 2025 earnings.

This is the valuation metric known as the price-to-earnings (PE) ratio, which is essentially how much an investor is paying for one year’s worth of earnings in the market.

At these levels and conceptually, an investor is paying P9 to P10 for every one peso of earnings produced by companies in the market.

That PE may not mean much on its own but at previous highs of over 20x during the past decade, this means an upside of around 50 percent at the minimum — and assuming mean reversion.

While it sounds technical, the mean reversion theory simply says that financial prices go back to their long-term average over time, just like our overseas Filipinos — babalik ka din (you shall return).

While there is evidence of mean reversion in financial markets, the results are mixed.

Arguing the case of the Philippine stock market on this basis is reasonable but for such a strategy to work, timing is equally important.

Having said that, the PSEi is ridiculously cheap. It has been argued that the last time the market was trading at these valuations was during the 2008 global financial crisis.

The argument is that the PSEi is extremely undervalued because the PE prices in a market are in crisis, a situation that we are not experiencing just yet.

Having been in the market for more than 30 years, the PSEi’s current valuation is nostalgic because these were similar to the levels before the 1997 Asian financial crisis.

To those who can remember or appreciate corporate history, these were the levels when PCIBank and Far East Bank and Trust existed and the former merged with Equitable Bank to become Equitable PCIBank, which eventually merged with Banco de Oro to form what we now know as BDO Unibank.

Back then, our current market PE would have been considered expensive.

We can agree that based on a lookback basis, the PSEi’s forward-looking valuation is crazy cheap.

So, why are the bargain hunters not biting? At these levels, surely, we should see an appetite for risky assets such as stocks. Yet, investor interest remains lackluster.

Asking this question during a recent investor conference with the management of large companies gave me the impression that the current general strategy of companies is to focus on existing operations.

In other words, the appetite for new investments is opportunistic.

Investors may be lukewarm to bargain-level prices because of: 1) financial capacity considerations (i.e., budget/debt); and/or 2) expectations, specifically if there are doubts over growth and returns.

These two factors are linked to the direction of interest rates. For investor demand to return, interest rates need to come down and free up financial capacity to invest and, more importantly, reduce cost of doing business and fire up growth opportunities.

This is a critical ingredient if we are to see investors, both foreign and local alike, acting on these crazy cheap market valuations.