JP Morgan bullish on consumer, property stocks

American financial services giant JP Morgan is upbeat on Philippine consumer, property and banking stocks this 2014, a year when selective investing is seen as a key theme.

Jeanette Yutan, head of research at JP Morgan Securities Philippines, said the preferred investment strategy this year would be to choose stocks with domestic focus, those that could leverage on the country’s strong economic growth and those that have structural growth momentum.

Average earnings per share (EPS) for listed Philippine corporations might rise by 11 percent this year, based on JP Morgan’s forecast, which is slightly higher than the consensus forecast growth of 8-9 percent for companies in the benchmark index MSCI Philippines.

Yutan said JP Morgan’s earnings outlook for the year was anchored on a more positive view on the consumer and property sectors. The firm also sees scope for earnings upgrade for banks this 2014.

Earnings drag

It said there were two reasons why EPS growth forecasts for the Philippines were not moving up as fast as the upward revision momentum for the country’s gross domestic product (GDP). First was the projected earnings drag by banks, which are not likely to replicate extraordinary trading gains seen in previous years. Based on JP Morgan’s forecasts, the local banking sector’s EPS might drop by a low single-digit level this year.

Downside risk for the utilities and power sector is also seen as another dampener on earnings this year. In the case of Aboitiz Power, for instance, earnings drop was seen arising from the expiration of an income tax incentive, the repricing of a key power plant and a significant decline in ancillary revenues, Yutan said.

“So the scope for earnings upgrade for 2014 is actually limited to banks,” Yutan said, noting that JP Morgan had recently turned positive on banks on valuation opportunities and projected improvement in core operations.

More lending

Yutan said the 30 percent decline in banks’ stock prices since May last year might have already taken into account the decline in trading gains as interest rates bottom out from record lows this year.

At the same time, she said core operations of banks were really positive because the sector was reducing the duration of resources and the drop in loan-to-deposit ratios was forcing them to deploy more liquidity to traditional lending, particularly higher-margin consumer loans.

For the banking sector, JP Morgan’s top picks are Banco de Oro, Metropolitan Bank and Trust Co. and Security Bank.

Alongside the turnaround seen for the banking sector, JP Morgan also favors the property counter from a “bottoms-up” view. “The wall of liquidity will put a cap on mortgage rates and banks will be forced to compete for market share. This is a sector that benefits from the wall of liquidity as banks increase home mortgage lending,” she said.

No bubble

Asked whether she sees a risk of a property bubble forming in the Philippines, Yutan said this was not the case. “Although capital values have definitely moved up, they are still below the peak we’ve seen in pre-Asian crisis, so that’s one of the assuring factors. And then if you look at inventory levels of property players as well as vacancy rate, it’s still quite manageable,” Yutan said, noting that the vacancy rate for high-rise residential property, for instance, was at only 10 percent.

At a consumer loan-to-GDP of about 2 percent (including mortgages), household leverage in the Philippines is seen as one of the lowest in the region.

The consumer sector is also favored by JP Morgan on the back of high structural growth opportunities underpinned by growing consumer affluence in the country alongside rising organized retail penetration, Yutan said.

JP Morgan was “structurally bullish” on organized retailing, with Puregold Price Club Inc., Robinsons Retail Holdings and Jollibee Foods Corp. as the preferred picks, Yutan said.

For telecommunications, JP Morgan is “relatively negative” on the sector on the view that the shift toward data business will put a lot of downward pressure on margins and require heavier capital outlays. “Competition may have waned in the last few quarters but margin compression is still a key risk,” Yutan said.