Stocks seen trading lower

Local stocks are seen trading with downside risks this week as the market weighs the stream of second-quarter corporate earnings, US monetary policy and the recent rebalancing of the closely tracked MSCI indices.

The main-share Philippine Stock Exchange index last week

gained 1.9 percent to close at 6,525.95 on Friday. Local stocks slumped in the last two days, however, due to an MSCI realignment that cut the weight on SM Investments Corp. as well as the increased probability of a US Federal Reserve’s tapering of bond buying starting next month.

Banco de Oro Unibank chief strategist Jonathan Ravelas said the market’s inability to test 6,700 highlighted a potential return to the 6,350-6,400 levels. “A break below 6,350 may signal that a test toward the 6,000-6,150 levels may occur,” Ravelas said.

Gregg Adrian Ilag, an analyst at AB Capital Securities, said the PSEi was now trading at 16x projected earnings for 2013 and 15x forecast earnings for 2014 versus a regional peer median at price to earnings ratio of 14x for 2013 and 12x for 2014.

“Median earnings growth of the PSEi constituents is at 8 percent for the second quarter, slower compared to the 15 percent during the first quarter. This implies that growth momentum of profits is not accelerating,” Ilag said.

Ilag also noted that while headline profits of local companies were strong, only a few companies outperformed AB Capital Securities’ expectations. Given these results, his firm thinks that upgrades on consensus projections would remain limited and this meant that without earnings upgrades, the market would be unwilling to pay a higher price for equities.

“With August being a seasonally weak month for stocks and slower earnings momentum, we continue to see downside risk from the market’s current levels. We recommend investors to take profits on rallies and be ready to position themselves at the next dip,” he said.

Apart from a continuing stream of second-quarter earnings, investors are awaiting the US Federal Reserve’s publication of its Federal Open-Market Committee (FOMC) meeting minutes, which will provide insights into the economic conditions of the United States, Ilag said. Doris C. Dumlao