Local stock prices expected to continue rising

MANILA, Philippines–High growth rates, low inflation and a stable economy should bode well for local stock prices this year, with the main index expected to climb in line with rising corporate profits.

American banking giant JP Morgan said shares in publicly listed shares were “justifiably expensive” compared to historical and regional norms, adding that high valuations were expected for companies in countries growing as fast as the Philippines.

“The underlying level of domestic demand here is good and the corporate sector is increasing investments from a low base,” said Adrian Mowat, head of JP Morgan’s emerging market and Asian equity investments group.

Speaking to reporters in Manila this week, Mowat said JP Morgan was keeping its “overweight” rating for the Philippines this year, despite the high prices of local shares relative to regional standards. The bank has had an “overweight” rating for the Philippines for five of the last six years up to 2014.

In 2014, the benchmark Philippine Stock Exchange Index (PSEI) rose 23 percent to a then-record level of 7,230.57 points. This marked the sixth consecutive year in a row that the index closed higher.

Since then, the index has continued to hit new highs, driven by foreign funds buying into the market. The index’s price now hovers around 20 times that of corporate earnings.

Corporate earnings justify this high price, Mowat said. Profits of firms in the 30-company stock index are expected to grow at a rate in the “high teens,” based on JP Morgan’s projections. Stock prices should move in tandem.

Mowat said the Philippines was enjoying the expectation of higher growth rates, stable consumer prices, and low interest rates. “Fundamentally, that’s a good backdrop … the general message is upbeat,” he said.

Several developments may still derail the local market’s surge, among them a possible severe reaction to the US Federal Reserve’s expected hike in interest rates by the middle of this year. Uncertainty over the continuation of reforms ahead of 2016’s presidential elections may also erode confidence in the market, Mowat said.