Market strategists see 2017’s short-term pain leading to gains
PHILIPPINE EQUITIES should be able to ride out the storm in the year ahead, with prompt implementation of the government’s development and tax reform programs serving as a catalyst to accelerate corporate earnings gains and enable the stock market to track the economy’s high-growth trajectory.
During the Business World Stock Market Roundtable at the New World Makati Hotel on Tuesday, Thomas Earll A. Huang, equity research analyst at BDO Nomura Securities, Inc., said local stocks will be vulnerable to “corrections” because of the headwinds down the road, but the magnitude of decline will not be the same as “what we experienced
in the Asian financial crisis,” noting that the Philippines is “structurally different” now from what it was before.
Michael Gerard D. Enriquez, chief investment officer at Sun Life of Canada ( Philippines), Inc. shared this view, recalling that “[m]arkets were falling 10% a day back then.”
“We have not experienced that despite the external factors we have seen in the past couple of years. It’s a testament to the stronger fundamentals in the Philippines and the fact that, previously, the Philippine market was dominated by foreigners.”
Equities will be in for a volatile year, as investors grapple with uncertainties in the form of higher inflation, rising interest rates, the impact of United States President Donald J. Trump’s protectionist policy and the election in Europe that could see populism sweep the continent.
The reduction in poverty incidence and the increased pace of job creation reflect solid economic growth, which has been riding primarily on robust private consumption, said Augusto M. Cosio, Jr., president at First Metro Asset Management, Inc. Household consumption accounts for two-thirds of the Philippine gross domestic product (GDP), which is one of the fastest growing in Asia.
Expected to further boost consumer spending is the approval of the tax reform program, whose income tax reduction component is estimated to add 20% to the disposable income of 93% of the country’s taxpayers, said April Lynn L. Tan, vice-president and head of research at COL Financial Group, Inc.
Enactment of that four-part program, she added, could secure for the Philippines another credit rating upgrade, similar to how the imposition of a higher value- added tax ( VAT) rate in 2006 had been instrumental in winning the country’s first investment grade rating in 2013.
To sustain the country’s economic run beyond 7%, the Philippines, however, must bring down the share of consumer spending and jack up the contribution of foreign direct investment (FDI) and government spending, Ms. Tan said. The Philippines has lagged behind its neighbors in terms of luring FDIs. To draw more job- generating foreign investments, the government must address infrastructure bottlenecks, reduce red tape, provide clarity on policies and honor contracts, the market analysts said.
“We’re quite excited about government spending or infrastructure spending, which they have been hyping about since six years ago. That will bring us out of 5-6% and will propel us to 7-8% GDP growth,” Sun Life’s Mr. Enriquez said.
BDO Nomura sees investments and infrastructure spending unlocking the potential of the Philippine economy, fueling a 6.3% expansion this year before accelerating to 6.5% in 2018. “It’s all about execution,” Mr. Huang said. While the country’s economic growth has shifted to high gear, the stock market has failed to track this above-trend growth since investors have also been responding to local and external events.
The country’s GDP climbed 5.8% in 2015 and 6.8% last year, but the bellwether Philippine Stock Exchange index (PSEi) — a barometer of investor confidence — ended in the red in both years.
“The market is basically moved by sentiment: how people appreciate the news that come out,” said Justino B. Calaycay, Jr., head of research and marketing at A&A Securities, Inc.
“But the fact that the GDP keeps on moving higher and the stock market is going down, this divergence opens up buying opportunities moving forward.”
So far, companies have been capturing the country’s stellar GDP. Revenues are increasing by 15-20%, but the impact on bottom line has been tepid because of rising costs, Sun Life’s Mr. Enriquez said.
“We need to build capacity down the road we have to build capacity for us to be competitive and for these companies to be efficient in their operation. How? Through infrastructure,” Mr. Enriquez said.
A&A Securities’ Mr. Calaycay sees the PSEi hitting the 7,500-7,700 band this year, while BDO Nomura’s Mr. Huang projects earnings growth to stay flat near the 10% level until next year.
The latter issued an overweight rating on banks, conglomerates and industrial firms; an underweight view on consumer and telecommunication companies; and a neutral rating on property and utilities.
Listed companies may take a hit from higher excise taxes on tobacco and alcohol products as well as on cars and fuel, the end of contractualization, the shift to an independent foreign policy and the proposal to remove incentives for business process outsourcing firms in Metro Manila, COL Financial’s Ms. Tan said.
“Short term, it will be very painful for us, but 2018 going forward is going to be better,” she said.
“When conditions are bad, that’s the time we should be excited. We’re now at 7,200 but if this market gets sold down like in the past year back to 6,000-6,500, rather than matakot tayo ( get scared), we should be excited and start accumulating.”