First of two parts
THE YEAR 2015 was a very challenging period for the stock market, which had to contend with global headwinds and massive volatility which were inherent to an aging bull. For the first time in six years, the local stock barometer ended the year in negative territory.
The Philippine Stock Exchange index shed a total of 278.49 points or 3.85 percent to close 2015 at 6,952.08.
For 2016, some have projected a modest rise while others see the demise of the bull market. This is seen to be an even more challenging year, with the run-up to the hotly contested presidential elections adding to the uncertainties created by concerns over the Chinese economy and the start of the US Federal Reserve’s interest rate hikes.
“Election uncertainty could continue to dampen market performance, similar to the past four elections when the PSEi was weak three to six months prior to voting day. Any post-election market rally [which occurred in three of the past four elections] will likely be modest unless the winning candidate unveils a clear and compelling national agenda [which at this point, seems unlikely],” Citigroup stocks analyst Minda Olonan said in a research note.
Citigroup’s base-case or central scenario is for the PSEi to rise to 7,350 this year. Its best case scenario is for the PSEi to end 2016 at 8,050, based on the assumption that investors will be willing to pay 19 times (price to earnings or P/E ratio) the amount of money they expected to make from this market.
Earnings of PSEi stocks (excluding gaming firm Bloomberry Resorts Corp. and conglomerate San Miguel Corp.) are expected by Citigroup to rise by an average of 11.6 percent this year, higher than the projected average growth of 8.7 percent in 2015 and 5.1 percent in 2014.
“While the Philippines’ macro fundamentals remain relatively defensive, the weaker global environment, slower GDP (gross domestic product) growth, and election uncertainties will make it challenging to keep a valuation premium,” Olonan said.
While the 12-month forward-looking P/E ratio of the local stock market has gone down to 17x, it is still seen much higher than the 13.4 times average P/E ratio seen across the Southeast Asian bloc. As such, Olonan said: “current valuations do not look compelling in our view, despite the Philippines being positioned as a relatively more defensive market.”
Jonathan Ravelas, chief strategist at Banco de Oro Unibank, said the PSEi could rise back to the 8,000 level this year if investors would accept a price-to-earnings ratio of more than 20 times. However, he said the more prudent target would be 7,400 to 7,600, consistent with the price-to-earnings range of 18 to 19 times across stock markets globally.
“Investors can’t discount the possibility that the local stock market could hit as high as the 9,000 level in 2017 with the assumption that the next administration will implement and execute well major infrastructure projects needed to further boost investments,” Ravelas said.
“A virtuous cycle of investments, job-creation and sustained consumer spending should keep the peso relatively stable at the 47:$1 level over the medium-term,” he said.
Bearish
Jose Mari Lacson, head of research at Campos Lanuza & Co., is among those who believe that the reign of the bulls is over. This is even if the PSEi has yet to decline by 20 percent from the peak level [of over 8,100], the magnitude of pullback typically used to determine that a market had entered the bear territory or a period of sustained decline in share prices.
“We expect this bear market to test the patience of most investors,” Lacson.
“This bear market will have the legs to keep itself moving over the next six months and possibly for the whole 2016.”
Lacson said it would likely take time for prices to correct to levels that won’t reflect the fundamentals under tighter global liquidity and slower economic growth.
All in all, Lacson said the strategy would be for investors to be patient and let valuations come to them instead of going after share price rallies.
“China’s currency policy is a source of volatility. The second biggest economy in the world has demonstrated its willingness to devalue its currency to sustain its economic growth. A devaluation of the renminbi may have implications on US monetary policy, which this December has shifted to tightening mode,” Lacson said.
What will likely come next, Lacson said, would be a dynamic process of counter-cyclical policy moves between the US and China.
“And the Philippines, like other smaller economies will be in just for the ride. The Bangko Sentral ng Pilipinas (BSP) will have to keep a fluid stance to potential shifts in the peso,” Lacson said.
Similar to the global stock market meltdown seen on Aug. 14, 2015 triggered by the economic woes of China and the revaluation of the renminbi, Lacson warned of rapid net outflows of capital because of such possible policy surprises. “It’s all a matter of policy surprises and reactions,” he said.
On the other hand, Lacson said there were two things likely to bode well for the Philippines—soft commodity prices and election spending. “Both will help keep domestic purchasing power strong and consumption spending healthy. Election spending is expected to be weaker than in 2010 but will nevertheless provide a boost. Under a sustained weaker peso, we can also count on OFW (overseas Filipino worker) remittances and BPO (business process outsourcing) revenues to drive consumption spending growth,” he said.
‘Musical chairs’
As the presidential race continues to heat up, Citigroup’s Olonan said recent events might lead to key changes to the presidential lineup. The Commission on Elections (Comelec) has ruled disqualifying popular candidate Senator Grace Poe from the race, on residency and citizenship issues. Poe recently obtained a temporary restraining order from the Supreme Court on the Comelec’s decision to disqualify.
In the meantime, the substitute filing strategy of another popular candidate—Davao City Mayor Rodrigo Duterte—is still undergoing Comelec review.
“The disqualification of Senator Poe will benefit all the candidates, although Mayor Duterte will likely gain the most. He is also perceived to be ‘independent’ and an advocate of clean government—but his unfiltered language and other allegations have led to concerns in some sectors,” Olonan said.
“Having a grassroots machinery, which favors Secretary Manuel “Mar” Roxas and Vice President Jejomar “Jojo” Binay, may not be as valuable with more independent-minded ‘millennials’ who account for an estimated 49 percent of the electorate,” Olonan said.
The Citigroup analyst noted that unlike the 2010 elections—when corruption was the voters’ top issue—the need for effective and faster execution of government projects and reducing crime were now the key issues. Each candidate can play up his/her own strengths, and the race remains fluid,” Olonan said. (To be concluded)