As debt fears ease, investors return to Philippines

Local stocks are on their way to greater heights, with the main index likely breaching 4,900 by yearend and 5,600 next year, as investors get over global concerns and focus on rosy domestic fundamentals, says leading online stockbrokerage CitisecOnline.

In a briefing on Wednesday, CitisecOnline head of research April Lynn Tan said the challenges facing the global economy were starting to fade following the resolution of US and European debt problems.

As such, she said “the market’s focus will go back to the Philippines where fundamentals are a lot stronger.”

At the same time, Tan said inflation was peaking, which means that the local central bank may be at the tail-end of its monetary tightening cycle. She added that global funds were flowing back to emerging markets from developed markets, while the global economy was expected to perform slightly better this second semester relative to the first half.

Even assuming continued delays in the public-private partnership (PPP)-funded infrastructure program—touted by many as a catalyst for domestic economic and corporate earnings growth—she said the main-share Philippine Stock Exchange index had more room to go up this second semester through 2012.

CitisecOnline’s base case scenario of the index hitting 4,900 by yearend assumes that fairly valued stocks would appreciate only in line with earnings growth, bargain stocks would catch up with the rest of the market, and stocks with merger and acquisition (M&A) activities would stay flat.

“One of the reasons why the market seems expensive to start with is because of stocks with M&A (stories) like Lepanto (Consolidated), Philex (Mining), and Meralco,” Tan explained. Even outside of these stocks, she said there would be a lot of opportunity to invest based on growth potential.

Any sell-off, Tan noted, would only be a chance to increase equities position.

Tan said this outlook assumes that corporate earnings would rise by only 8 percent this year, coming from a high base last year when many companies posted record-high profits. Growth in average earnings per share next year is seen jumping to 17 percent.

“We’re clearly in a bull market,” said CitisecOnline vice president and chief technical analyst Juanis Barredo, noting that the market bottomed out in 2009.

However, Barredo said there would likely be bumps going forward as the local market had finished the first big wave in its upswing and was now on a so-called “grinding” phase.

As such, he said trading would likely be choppy this second semester but recovery would likely happen by the fourth quarter.

Among property stocks, Tan said Ayala Land was CitisecOnline’s top pick given its strong balance sheet, huge landbank and large leasing portfolio that is providing it with recurring cash flow.

Bank of the Philippine Islands and Banco de Oro are among Tan’s top banking picks.

In infrastructure, Tan cited DMCI Holdings and SM Investments. Alliance Global Group and Cebu Air are CitisecOnline’s top picks for tourism while International Container Terminal Services was cited as the best buy among emerging market stocks given the location of its existing ports and strategy of acquiring ports in emerging markets.