Local stocks expected to continue rally until ’15

The local stock barometer is seen to continue its upswing on the back of favorable macroeconomic fundamentals but likely shy away from retesting record highs of around 7,400 until next year.

For this year, the Philippine Stock Exchange index (PSEi) would likely hit the 7,000 to 7,200 levels and the price-to-earnings (P/E) ratio reaching 19x to 20x, based on the latest forecasts made by local investment house First Metro Investments Corp.

“The economic outlook for the Philippine economy remains favorable despite a slower-than-expected GDP (gross domestic product) growth in the first quarter,” said FMIC president Roberto Juanchito Dispo.

Based on FMIC’s forecasts, the country’s GDP may still grow by 6.6-7.5 percent this year—sustaining an above-trend trajectory—driven by domestic consumption that, in turn, will be fueled by strong remittances and services as well as the continued expansion of manufacturing.

“Heightened government spending, strong consumer demand and remittances from the more than two million overseas Filipino workers will continue to drive growth. Confidence in the real economy remains high given the country’s strong external liquidity and investment position and effective monetary policy,” Dispo said.

Bede Gomez, FMIC assistant vice president and head of investment advisory group, said the PSEi was not likely to breach new highs this year. Last year, the PSEi hit a record high 7,400 before falling back to bear territory after the US Federal Reserve announced its tapering of the aggressive monetary stimulus.

“If it happens, it will be very expensive,” Gomez said.

The local market is currently trading at a P/E ratio of about 21.61x versus the historical valuation of 14-15x. This means that investors are paying 21.61 times the amount of money they expect to make from this market.

FMIC is expecting the market to trade within a range of 19x to 20x this year, in line with the market consensus of 19.07x.

For now, Gomez said FMIC would stick to its PSEi target of 7,000 to 7,200 for this year. This forecast is based on an average growth in corporate earnings of 15-18 percent this year. To date, he said earnings growth was trending at 10.74 percent versus the market consensus of 13 percent.

Apart from the buoyant macroeconomic backdrop, Gomez said the normalization of bank earnings could be among the market catalysts in the second half of 2014. The absence of large trading gains that bloated bank earnings last year has caused a contraction in most banks’ earnings this year.

This year, key industries that will lead the market higher are property, infrastructure, power and utilities, consumer, gaming and manufacturing.

But toward the end of the year, Gomez said investors would start looking at prospects for 2015. Among the strategic sectors to look forward to in the coming year are power/energy, manufacturing, banking and mining.

Certain events are also seen to help prop up the economy starting 2015, such as the start of election spending as well as the Philippines’ hosting of the Asia-Pacific Economic Cooperation (Apec) meetings.