Market forecast 2018: Sunny with a chance of rain
The year 2017 ended with a bang for the Philippine Stock Exchange but market analysts note that 2018 may even be a better year for local stocks which will benefit from a confluence of global and domestic developments.
On the last trading day of 2017, the PSE marked the first time that the PSE index (PSEi) closed at a record high on the last trading day of the year. The PSEi rose by 23.33 points or 0.3 percent to 8,558.42.
This was the 14th time that the main index closed at an all-time high this year. For 2017, the PSEi gained 25.1 percent.
“On a global perspective, we see emerging markets to have a stronger outlook for the year. A growing narrative in the market is that most economists in the world are growing in a synchronous fashion – which suggests that the growth cycle has further room to run,” said Regina Capital Development Corporation Managing Director Luis Limlingan.
For his part, Philstocks Financials, Inc. Head of Research Justino Calaycay Jr. the local economy will get a boost from the new tax reform package and “we pencil the PSEI’s potential range this coming year at between 10,700 and 11,000 on the upside.”
However, he cautions that “there are domestic risks that could derail this and noted that “the downside is drawn at between 8200-to-8500.”
Global developments that could boost local equities are led by the United States’ own tax reform and the recovering American economy which are seen to boost US stock markets, said Limlingan.
Domestically, he said “we see the Philippines ramping up as soon as the TRAIN (Tax Reform for Acceleration and Inclusion) is implemented.”
“We expect infrastructure rollouts to further ramp up. Order books of construction companies may continue to pick up as well (as already seen as of the third quarter of 2017). So far the government is beginning to keep its end of the bargain to ramp up spending on the second half of 2017, hence continuations by next year is more probable,” said Limlingan.
For his part, Calaycay said “the general view is that TRAIN is a boon to the economy. It is said to be revenue positive for the government and should prop Duterte’s ambitious ‘Golden Age of Infrastructure’ push.”
He noted that, “if these projects get underway it will provide jobs thus increasing the households with income. With the TRAIN removing individual tax payments for incomes of up to R250,000 p.a., these lower income households, existing and new, will have more expendable incomes.”
This will be a boon, since the Philippines is a consumer spending-driven economy (70 percent of gross domestic product on the demand side.
Businesses peripheral and satellites to the infrastructure and construction industries will also benefit from increased activity.
He summed up that, “riding on the TRAIN’s selling point, GDP should get some boost. We estimate 2018 GDP to climb from our 5.8 percent to 6.3 percent 2017 projections to 6.2 percent to 6.7 percent.”
“We expect listed-firms earnings to expand close to its 10-year average pace of between the high single digits to the low double digits. Our metrics show the potential range at around 9.5 percent to 13 percent,” said Calaycay.
He added that, “consumer retail stocks, infra-related counters, power and utilities and food and beverage are inside our radars. Short-term volatilities may show up in the telecoms sector as the ‘third player’ narrative unfolds.”
“However, what many seems to push under the rug is TRAIN’s impact on inflation. After having ‘freed’ up spending money and sending it to the hands of households, it will gradually take those back through the resulting higher prices of basic (and even not-sobasic goods) as it imposes new and/or additional levies on oil and oil products and sugar-sweetened food and drinks, as well as increasing the value added tax,” Calaycay pointed out.
“The increase in excise taxes and broadening of the VAT tax base under the current tax-reform package is expected to add 80-140 basis points to annual inflation in 2018, we expect inflation to be at the higher end of the Bangko Sentral’s range (3 percent to 4 percent),” he added.
Calaycay explained that “expectations of higher prices may get people to be more circumspect in their spending patterns. While this may increase savings and hopefully investments (especially against known inflation hedge – stocks) it is a more ‘circuitous’ route in spurring economic activity as actual, direct household spending does.”
On the risk side, Calaycay pointed to tensions between the US and North Korea which, “we don’t think it will escalate into actual armed conflict” but “may lend short-term gyrations nevertheless.”
Locally, Calaycay said “the biggest risk would be the May 2018 barangay election and, soon after, the preparations and positioning for the 2019 mid-term elections.”
“There is also the lingering threat of Charter Change which this administration is clearly intent on pushing for – the only way to make the move to shift to Federalism possible,” he said.