JP Morgan raises 2014 growth forecast for PH

American financial services giant JP Morgan sees the Philippine economy expanding at a faster clip than it previously expected this year, supporting local stock market resilience despite currency weakness, an inflation spike and heady valuation.

Based on a research note dated Feb. 19, JP Morgan has raised up its gross domestic product (GDP) growth forecast for the Philippines to 6.6 percent, or one percentage point higher than its outlook three months ago.

Although the new GDP forecast is slower than the 7.2 percent growth posted in 2013, which was an election year, the growth forecast is two percentage points better than the average forecast for emerging market peers and not too far from the 6.5-percent consensus outlook.

In the report, JP Morgan said it expected economic momentum as measured by quarter-on-quarter seasonally adjusted annual rate of GDP growth firming up at 8.7 percent this first quarter of the year before easing to 5.3 percent in the second quarter. Quarter-on-quarter growth is seen picking up to 6.6 percent in the third quarter and 7 percent in the last three months of 2014.

“We believe that robust macro growth will translate to EPS (earnings per share) growth surprise this year; we think banks will be the catalysts,” said JP Morgan Philippines head of research Jeanette Yutan.

“Domestic demand growth is robust. Government spending momentum is intact while capex (capital expenditure) cycle is seen across the major Philippine conglomerates,” she said in the research note.

Overseas Filipino remittances and the robust business process outsourcing (BPO) sector remain key domestic growth drivers, the study said.

JP Morgan included the Philippines and Indonesia in the roster of nine emerging markets where it has an “overweight” rating on, suggesting an increase in position in excess of key benchmarks. The other favored emerging markets are Korea, Taiwan, India, Thailand, Russia, Greece and Peru.

On the other, the emerging markets that JP Morgan is “underweight” on are China, Brazil, Colombia, Turkey and Poland.

JP Morgan’s chief emerging market and Asian equity strategist Adrian Mowat, in the latest research note, continued to favor emerging markets to developed markets— a view which runs contrary to current market consensus. Another nonconsensus view is that the tapering of monetary stimulus will even be bullish for emerging market equities and will also bring net inflows into emerging-market US dollar bonds.

Mowat also sees China lagging the emerging market world but this will not prevent the rally in emerging market assets.

Meanwhile, the Philippines’ Metrobank landed on JP Morgan’s top 10 picks for emerging market stocks. This is in line with its recommendation to rotate funds to banks given attractive risk-reward prospects following the 30-percent price pullback since May last year.

The brokerage said core earnings of Philippine banks looked upbeat while valuations were now reasonable.

“Property and consumer (stocks) are relatively expensive but we prefer quality names with strong earnings outlook,” the research said.

JP Morgan likes grocery chain operator Puregold Price Club, citing its strong structural growth, and also property developer Ayala Land for “solid business model, robust earnings momentum and reasonable valuations.”

Meanwhile, Metro Pacific and Ayala Corp. are long-term value plays favored by JP Morgan.

“We are cautious on AP (Aboitiz Power) due to earnings risk,” the note said.