PH stock market seen still facing tough times

LOCAL stocks face tough times ahead until the US Federal Reserve starts raising inter- est rates, after which the local barometer is expected to stabilize and eventually revisit its fair valuation of about 7,600 moving toward 8,200 next year.

Michaelangelo Oyson, chief executive officer of BPI Securities Corp., said this in a briefing yesterday.

“But until there’s clear guidance on the US Fed’s interest rate direction, the Philippine Stock Exchange index will likely trade at a wide range of 6,600 to 7,200,” he said.

“This is one of the toughest times for the stock market that I’ve been through. It reminds me of the Asian crisis, the global crisis of 2008 and some semblance of what happened in 2013,” said Oyson, who has a 17-year experience in the stock brokerage industry, including stints in New York, Singapore and Hong Kong.

In the late 1990s, Oyson worked at Deutsche Regis in the Philippines and was well remembered for a controversial 1997 Philippine banking report “Clearly a Present Danger” that gave a critical assessment of the local banking industry before the Asian currency crisis erupted.

The guidance from US Fed chief Janet Yellen is a key overhang for the market alongside the economic woes in China.

“But suffice to say, a lot of the tourist inflows have left,” he said, noting that the Philippine bourse was now seeing the second largest outflow of foreign portfolio—also known as “hot money” due to its volatile nature—in the last eight years. He said that at the height of the global financial crisis in 2008, about $1 billion in foreign funds exited the market.

He noted that in 2013, when the US Fed first indicated plans to withdraw the monetary stimulus that had boosted markets around the world, the country still posted a net foreign inflow of $700 million, although this had fallen from a peak of $1.2 billion in the same year.

This year, from a peak of $1.2 billion in inflows in April and May, Oyson estimated that foreign funds were now in a net selling position involving $236 million.

This funds flow data, Oyson said, would give an important guidance on where the market was heading because what’s happening at the stock market had “little to do” with the country’s still rosy macroeconomic fundamentals.

“Were just part of the collateral damage in terms of what’s happening in China, Middle East and the concerns on the US interest rate hike,” Oyson said.

In this regard, Oyson said the stock market was not yet out of the woods because the exchange rate had yet to stabilize. During the global financial crisis of 2008, he said the peso had depreciated by at least 15 percent from 41 to 50 against the US dollar as foreign funds dumped emerging market assets. In 2013, the peso depreciated by about 10 percent from 41 to 45.

The peso might overshoot 47:$1 and beyond until the US Fed’s move becomes clearer, Oyson said.

Currency is important because it will have an impact on foreign funds’ allocation.

“If they expect the currency to weaken, they will pull out funds ahead of further depreciation so there’s a second-order effect,” Oyson said.

He, however, said that after the surprise devaluation of the yuan, there were talks that further devaluation might be sanctioned in China to regain competitiveness.

Onthe Philippines, Oyson said the impact on the economy of a weaker peso might be “more muted than it appears to be.” He noted that despite the sharp peso depreciation in 2008, the Philippine economy continued to grow after a blip that lasted only for one quarter.

Another reason why the local stock market was not over the hump yet, Oyson said, was the fact that other markets had yet to stabilize in terms of valuation. Relative to other markets, he said Philippine stocks remained relatively more expensive.

But once the dust settles, he said the market would remain attractive to global investors and regain high valuations. The conventional strategy, he said, would thus be to buy on dips highquality issues.

“Investors have to realize it is very difficult to catch the bottom of the market so the strategy must be based on risk tolerance to the downside,” Oyson said.

He said consumer names would likely to continue doing well given that the Philippines was a consumer-driven economy which would likely sustain a “new normal” growth rate of 56 percent.

By sector, BPI Securities is negative on banks and gaming, neutral on property and positive on the power sector. It has a neutral view on conglomerates depending on sector exposure.

BPI Securities’ top five stock picks are as follows:

Semirara Mining and Power Corp., due to strong earnings and catalyst from the reopening of the Panian mine);

Manila Electric Co., on healthy cash flow and electricity volume growth;

Century Pacific Food Inc. (on margin improvement, strong balance sheet and favorable impact of weaker currency;

Max’s Group Inc., on expected margin expansion and strong topline growth from stoare expansion; and,

Ayala Land Inc., on sustained double-digit earnings growth, aggressive pipeline of recurring income development and substantial amount of landbank for future developments.