PSEi seen hitting 6,500 mark

Despite emerging valuation concerns, the main Philippine stock index is seen reaching new highs, likely to hit 6,500 by the end of this year, given ample liquidity in the market and improved risk appetite, online stock brokerage COL Financial said.

In a Jan. 11, 2013, research note, a COL research team led by company research head April Lee-Tan said the two major drivers of the global stock rally seen today were liquidity and improving risk appetite as central banks around the world simultaneously eased monetary policies last year. But while the uptrend would likely continue, the research team said “it (2013) would be a very volatile year,” considering that several developed economies were still in a fragile situation.

It said key global concerns that negatively affected the appetite for stocks had been resolved, resulting in an improved risk appetite: Greece did not exit the eurozone and instead received much-needed funds to escape bankruptcy; there is less risk that highly leveraged countries such as Spain and Italy would encounter problems refinancing their debts; the United States was able to avert a fiscal cliff; and the Chinese economy started to show signs of bottoming out.

“Similar to global markets, our local market benefited from ample liquidity and improving risk appetite. Although the fundamentals of the Philippines are far better compared to those of developed economies, making us a compelling buy for foreign investors, nothing has changed to prompt a further upgrade in our view of the economy or to justify the recent surge in the market,” the group said in the research note.

It said the country’s favorable economic outlook was already priced in, with the PSEi already trading at 17x forward-looking price to earnings (P/E)—the upper end of its historical range—and is also trading at a premium relative to its global peers.

A P/E ratio of 17x means investors are paying 17 times the amount of money they expect to make from the market.

“Although the absence of positive surprises and the expensive valuations make it difficult to justify a continuous increase in share prices under normal circumstances, we realize that, presently, the more relevant question is whether liquidity conditions will remain favorable as this would determine whether this liquidity-driven rally is sustainable,” according to the COL research note.

“Based on our analysis, liquidity will be here to stay at least for 2013 as there is no reason for interest rates to go up given the benign inflation, the fragile economic condition of developed countries, and the BSP’s (Bangko Sentral ng Pilipinas) focus on preventing a sharp appreciation of the peso,” she said.

COL Financial’s yearend target of 6,500 for the Philippine Stock Exchange index, an upgrade from its earlier forecast of 6,100, implied a P/E of 18.3x. Although this was already very high based on the PSEi’s historical trading range, it said the implied earning yield of 5.5 percent was still above the yields of some of the most popular investment vehicles, namely: time deposits (2-3 percent), special deposit accounts, or SDAs (3.5 percent) and the 10-year T-bonds (4.4 percent).