Equities seen to fare better than fixed-income assets

Local equities are likely to outperform fixed-income assets this year but investors are advised to be “opportunistic and selective.”

For 2014, the average return on local bonds will likely drop by 3.25 percent as opposed to a potential growth in earnings per share of 5-8 percent (on a diluted basis) by publicly listed corporations, said investment house First Metro Investment Corp. in its outlook for the year.

For the first half of this year, FMIC sees local stock barometer Philippine Stock Exchange index rising to 6,300-6,500, translating to a price-to-earnings ratio of 17-18x, said Bede Lovell Gomez, FMIC investment advisory deputy group head. This means investors will be willing to pay 17 to 18 times the amount of money they expect to make from the market.

In a separate interview, Ismael Cruz, president of local stock brokerage IGC Securities, agreed that equities would perform better than bonds this year despite the global volatility arising from the US Federal Reserve’s tapering of liquidity-inducing bond buying operations.

He expects corporate earnings to grow by 5-10 percent this year. “For 2014, I would like to agree with Dr. (Nouriel) Roubini who says: When the dust settles down, investment flows will return to countries with strong fundamentals like the Philippines.”

But Cruz said investors must do their homework and look for solid blue chips. In 2013, for instance, Cruz noted that while the PSEi had risen by a modest 1.3 percent, selected companies outperformed, including: GT Capital Holdings (+22 percent); Nickel Asia Corp. (+20 percent), Semirara Mining Corp. (+30 percent), Universal Robina Corp. (+43 percent) and Alliance Global Group Inc. (+58 percent).

Cruz expects the PSEi to recover to around 6,600 through 2014.

FMIC senior vice president Justin Ocampo said the equity market this year would be “opportunistic” as well as “selective,” adding that the sectors likely to attract interest were those in the branded consumer, retailing, infrastructure, utilities and even the property market.

For the debt market, he said pre-funding will be a key theme. “Bonds will be very active this year while corporations try to diversify financing,” Ocampo said.

About P50 billion worth of corporate debt offering will be likely put in the pipeline in the first quarter of 2014, Ocampo said.

Reynaldo Montalbo, FMIC treasury group head, said that even if the local financial market remained very liquid, local yields would be more sensitive to fluctuations in overseas markets especially in the United States.

Yields are anticipated to face upward pressure in the latter part of the year. Treasury bill and bond rates are projected as follow for 2014: 91-day bills at 1 percent, five-year bonds at 3.5 percent, 10-year bonds at 4.25 percent, 20-year bonds at 5.25 percent and 25-year bonds at 5.75 percent.

“Local yields have reached optimal premium and therefore susceptible to (changes in) US interest rates,” he said.

For bondholders, Montalbo said returns compared to last year would likely decline this year for most tenors, such as 25-year (-2 percent), 20 years (-6 percent) and 10 years (-12 percent). Only the five-year tenor is seen attaining a higher return of 7 percent this year.