Stocks seen ripe for correction

Local stocks are now seen ripe for a correction, consolidation or rotation to allow the bulls to refuel and retest new highs, analysts from fund management group Philequity said.

In a briefing after the stockholders’ meeting of Philequity Management Inc. on Monday night, Philequity head of research Jerome Gonzales said the Philippine Stock Exchange index (PSEi) would consolidate between 6,600 and 6,900 before establishing new highs. He said the PSEi’s target would be to hit 7,400 by the first quarter of 2015 and 8,100 by the first quarter of 2016.

Nicolas Fernandez, an analyst at affiliate Wealth Securities, said the market might tolerate a valuation equivalent to 18x to 19x 2015 price-to-earnings, which means investors would be willing to pay 18 to 19 times the expected earnings for next year. “That will be around 7,100 to 7,400. Incidentally, our previous high was 7,400. That falls within that range. That’s what we’re expecting for the rest of the year,” Fernandez said.

The group is expecting muted earnings growth this year given the decline in bank earnings due, in turn, to slower trading gains but for 2015 to 2016, Fernandez said earnings would normalize with a growth of around 15 percent or about two to 2.5 times the likely growth in local gross domestic product (GDP).

Miguel Agarao, an analyst at Wealth Securities, said the local stockbrokerage was “neutral” on the local stock market for the short-term but “bullish” for the longer term.

“Mixed data point toward a pause in the rally, not an end,” Agarao said. “The market is ripe for a correction, consolidation or even a rotation. It’s a pause in the rally, not an end in the rally. When we run, a breather is always healthy. The new sideways movement we see now may be the base for the next rally.”

While it would be hard to predict how long the consolidation phase would take, Agarao said what was definite was that the next rally would spring out from this consolidation. At the same time, he said that if the global bull market was intact, deep correction in local equities would not be likely.