Stocks poised to continue climb for 4th straight year
DESPITE expectations that global economic uncertainties will persist throughout 2012, the main-share Philippine Stock Exchange index may yet again climb for the fourth straight year, and even reach new heights, aided by a resilient domestic economy and ample liquidity.
Based on a yearend poll of market experts, the local stock index may rise to at least 4,700 to as high as 6,500 this year, depending on how the fiscal crisis in Europe pans out. Corporate earnings are generally seen to rise by a double-digit level, supporting the PSEi’s quest to set new records.
The index ended 2011 at 4,371.96 points, up by a modest 4 percent, or around 170 points, from the end-2010 level of 4,200. It hit a record high of about 4,550 in August.
In 2011, the PSEi rose for the third consecutive year, building on the 38-percent and 63-percent rise in 2010 and 2009, respectively.
Alex Pomento, head of research at Macquarie Securities Group, said the index may hit 5,000 this year on a “base case” scenario and spike to 6,500 on a “bull case” scenario.
According to Pomento, a base case of 5,000 is anchored on the premise “that EU problems will continue to be an overhang” that may cap equity performance.
On the other hand, a bull case rests on a low interest environment expected worldwide, which “will induce a liquidity rally that could propel our equity market to new high,” he explained.
April Lee-Tan, head of research at leading online stock brokerage CitisecOnline.com, said the PSEi could easily end the year at 5,400 as the market trades back to its historical average price to earnings (P/E) ratio of 16x on the assumption that global risk appetite will improve.
A P/E ratio of 16x means that the market is paying 16 times the amount of money the company is making in a given period.
Unlike the challenging year that was 2011, this year is starting with conditions considered to be highly favorable for the stock market, Lee-Tan said.
She pointed out that corporate earnings were expected to recover given the low base in 2011. Prospects are also brightened by falling inflation and weak commodity prices, which may boost end-user demand and reduce margin pressure.
Interest rates are also expected to drop due to expectations of lower inflation and the strong possibility of a ratings upgrade, Lee-Tan said.
“Finally, market sentiment is very negative. These factors should be good for the stock market,” she said.
Although stocks are being sold down due to external jitters, “the bearish sentiment prevailing should be viewed as an opportunity to buy cheap,” she added.
Lee-Tan explained that the government could provide some positive surprise given indications that it was now “slowly but surely” starting to get its act together, by reversing the fiscal underspending that had weighed down economic growth in the first half of 2011 and finally start the rollout of its public-private partnership (PPP) program for infrastructure spending.
UBS Investment Research head of Philippine equity research Jody Santiago said the market environment could still be very challenging in the early part of 2012 given lingering uncertainties in overseas markets.
Santiago sees the PSEi climbing to a new high of 4,700 this year in line with an outlook of 10-percent local corporate earnings growth and sound macroeconomic fundamentals.
According to Lee-Tan, “the prevalence of bearishness is the greatest risk in our opinion, and would be the major reason why the market will continue to trade sideways. Although a lot of investors agree with our positive view of the Philippine economy and the stock market over the long term, most continue to stay on the sidelines given the lack of visibility of when and how the challenges facing the global economy will be resolved.
She noted that investors were still unusually bearish globally, citing the strong day-to-day influence of the US markets on local equities and the continuous preference for US issued bonds despite significantly low yields and the recent US credit downgrade.
“Nevertheless, we would like to stress that investors cannot avoid stocks permanently, especially with very low interest rates. Risk appetite will eventually return. Waiting for conditions to improve might be too late. As said by world renowned investor Warren Buffet, investing when others are fearful is the way to generate above average returns,” Lee-Tan said.
