The local stock market will likely remain volatile for the rest of the year and it may be the best time to favor “defensive” stocks over “index glamour” stocks, investment house First Metro Investment Corp. said.
In the July issue of “The Market Call,” FMIC’s joint publication with the University of Asia and the Pacific, it was stressed that the market was getting increasingly nervous over concerns about economic growth, corporate earnings and interest rate hikes by the US Federal Reserve.
“There could be further de-rating if second quarter 2015 GDP (gross domestic product) and earnings disappoint further in the upcoming quarters,” the research said.
“On a foreign funds flow perspective, we do not see robust inflows in the interim unless there is a strong rebound in GDP and earnings,” it added.
GDP growth in the first quarter was below market expectations at only 5.2 percent but FMIC said early signs for the second quarter point to a definitive recovery.
“We remain positive on the market, especially on certain stocks but we are waiting for attractive entry points,” the research said.
Given its view of increasing volatility and the difficulty in predicting the direction of foreign funds flows in the remaining quarters of 2015, the research said it preferred defensive stocks.
“We think index glamour names are still trading at rich valuations and are double-edged swords as their performance tends to be driven by the flow of foreign funds. Defensive stocks with strong near re-rating catalysts could outperform,” the research said.
Historically, the research said liquidity rises starting a year before the elections, boosting consumption spending. As such, it said expenditure on staples (groceries), liquor, cigarettes and fuel would likely go higher prior to elections.
In the second quarter of the year, the local market reflected foreign capital outflow as foreigners emerged as net sellers by P29.6 billion.