PSEi likely to close at 8,900 by end-2019

THE Philippine Stock Exchange index (PSEi) is likely to close at the 8,900 level by end-December, driven by lower interest rates and upbeat earnings expectations for the year, according to investment bank UBS Philippines.

UBS Philippines said that the volatility seen in the market last year has prepared the PSEi for a good 2019, with inflation is starting to slow down and consumer spending seen to pick up.

“The things that caused the market to be weak in 2018 are all reversing in 2019. In 2018, we had inflation at near 10-year highs, and we had consumption spending growth at eight-year lows,” UBS Investments Philippines, Inc. Head of Equity Research Jose Domingo M. Santiago III said in a press briefing in Makati yesterday.

“Going into 2019, we are seeing inflation fall and hopefully recover off a low base.”

Mr. Santiago cited two main drivers for the PSEi to surge toward the year-end target, namely interest rates and earnings.

UBS Senior ASEAN Economist Edward Teather noted that they expect a reversal of inflation and yields seen in the Philippines last year. Benchmark rates are currently between the 4.25-5-25% range, after the Bangko Sentral ng Pilipinas hiked rates by a total of 175 basis points in 2018 in an effort to tame elevated inflation.

“We’re expecting inflation to slow again, to reach 3% at some point in the second half of the year. That should be a relief to investors in the Philippines, that would bring yields down,” Mr. Teather said in the same briefing.

At the same time, Mr. Teather said they expect the BSP to keep rates steady within the year, on the back of expectations that the United States Federal Reserve will hike interest rates at around the same period and that inflation is likely to fall below three percent.

For corporate earnings, Mr. Santiago said companies are likely to record a 12.5% growth this year, versus their 8.5% earnings growth forecast in 2018.

Cyclical sectors, including property, banks, and consumer are seen to post a 15-18% uptick, since these sectors are the ones most impacted by the economy. This figure excludes the telecom and utilities sectors, which Mr. Santiago noted post slower growth, thereby pulling down and diluting the average.

The UBS year-end target for the PSEi assumes a priceto-earnings (PE) ratio of 19x, which the UBS research head said is still significantly lower than the 22x PE the PSEi has previously seen.

“If you are investing in the Philippines as a foreigner, then you’re main objective is to invest in growth. Because that’s how you make up for liquidity. That’s why our recommendation to investors is to invest in the fastest growing sectors,” Mr. Santiago said.

Asked on his outlook for companies pursuing initial public offerings this year, Mr. Santiago said there is a higher chance that more firms will go public in 2019, compared to a single company braving the market’s volatility in 2018.