Political uncertainties seen to hurt equities market

THE RUN-UP to the national elections in the Philippines will likely weigh down the peso and stock market this year but the consumer, media and infrastructure sectors offer selective investment opportunities, according to regional financial group Maybank Kim Eng.

In a regional research titled “Six for 16,” Maybank said election trends on flows and the domestic currency showed that investors were generally not enthusiastic of the Philippine national elections as incumbents were constitutionally barred from running for a second term.

“This is particularly true for the upcoming election as there is no certainty that President Aquino’s business-friendly policies and reforms would survive beyond his term of office especially if his favored candidate fails to win the election,” the research said.

“Thus, the equity market is likely to be the main victim of political uncertainties up to six months after the elections and the outflows should weigh on the peso as well. Consequently, this could see the US dollar-PHP climb higher in first half of 2016,” the research said.

The local stock market is seen to be buoyant in the first half but give back gains in the second half of the year.

On the other hand, the peso is seen to depreciate to 48:$1 in the first and second quarters of this year before recovering to about 47.80:$1 in the last two quarters. Apart from the election uncertainties, Maybank is “bearish” on the peso due to risks from the El Nino weather phenomenon and possible slowdown in overseas remittances from the weak global economy.

Across the region, Maybank has a more optimistic view for 2016 than a year ago, arguing for a bottoming process for Asian markets in absolute terms and relative to global equities, albeit in a volatile manner.

Despite several countries falling into recession, low valuations are seen to provide an opportunistic window to add risk to portfolios this year. Without black-swan or unforeseen events, Asian economies are seen to be on the mend.

“Cushioned by momentum in their domestic economies, India, the Philippines and Vietnam expect to be relatively unscathed,” the report said. On the other hand, Maybank’s teams in Singapore, Hong Kong and China believe that with the much bigger exposure of these countries to exports, they could be staring at heightened risks and uncertainties.

In the Philippine market, Maybank said its best pick from the stock market would be property developer SM Prime Holdings. “It is a big beneficiary of rapid growth in consumer spending during normal years, and especially so in election years. In addition, it is now reaping synergies from other recurring incomes, such as office and hotels/leisure, while the residential business is recovering well,” the research said.

Maybank forecasts a three-year net profit compounded annual growth rate (CAGR) of 17 percent in 2014-2017 for SM Prime,  driven by mall operations and new real estate developments.

With thousands of candidates vying for positions at the national and local levels this year, Maybank said spending on campaign ads and distribution of freebies as they tour the country should also boost ABS-CBN Corp. and Jollibee Food Corp.

“During election years, ABS-CBN Corp. gets a significant share of political ad spending by candidates. At the same time, regular advertisers take advantage of stronger consumption and accelerate their ad spending. Since 1998, ABS-CBN’s airtime revenue growth has averaged 20 percent during election years compared with 6 percent in non-election years,” the research showed.

Jollibee, the largest restaurant chain in the country, was projected to be a winner regardless of the outcome of the 2016 elections.

“The simple average of JFC’s share price appreciation from 1994 to 2014 is 20 percent year-on-year. The average was 10 percent during non-election years, but a much higher 40% in election years. We don’t think there is any reason 2016 will be different, which should again provide a strong upside catalyst for the shares.

Maybank also initiated coverage on Century Pacific Food Inc. (CNPF), the largest food canner in the country with a “buy: rating and target price of P20 per share based on a price to equity ratio of 19 times projected earnings this year, the average valuation of the Philippine consumer sector.