PSEi could zoom past 9,000 on Duterte’s economic tack

THE LOCAL stock barometer could breach the 9,000 mark next year on upbeat corporate earnings prospects backed by “transformational” reforms laid out by the Duterte administration to rebalance the Metro Manila-centric economy, the head of BPI Securities said.

Sharing the highlights of research commentary titled “Reboot Philippines 3.0” presented recently presented to foreign investors, BPI Securities chief executive Michaelangelo Oyson said the country was now on its third reboot since the EDSA Revolution.

“The first (reboot) 1.0 was about bringing back democracy and putting order (Cory Aquino and Fidel Ramos); 2.0 is fiscal reform (Gloria Macapagal-Arroyo and Benigno Aquino) and 3.0 is institutional reform,” Oyson said.

“A review of economic policies since the Marcos era indicates that a serious revamp of Philippine institutional and governance structures is necessary to sustain high levels of economic growth and improve Philippine competitiveness,” Oyson said.

The base case under the Duterte administration, Oyson said, would be for trend gross domestic product (GDP) to rise to 6.8 percent. The “bull” case would be 9 percent and the “bear” case scenario would be a growth of 3.7 percent.

Over the decades, Oyson said only consumption has grown while investment hardly moved as percent of GDP since the Marcos era. Government expenditure was flat as a ratio of GDP while net exports deteriorated. From the supply side, the services sector has moved up while agriculture has deteriorated.

“So my message to foreign investors is that Duterte is going to implement policies for sustainable growth. We had an old machine and all we’re trying to do was to replace the nuts and bolts,” Oyson said. “Duterte is trying to get a newer machine to push the sustainable growth in the Philippines and his models fit in the world economic competitive index.”

As such, BPI Securities sees the following as the major investment themes that would characterise the Duterte administration:

– declogging the Philippines (ramp-up of infrastructure spending);
– the rise of the next generation Filipino (income redistribution); and,
– the rise of next wave cities.

Any upgrade in the earnings of listed companies would be contingent on key reforms to expedite infrastructure development, he said.

Looking at the earnings consensus growth of about 11 percent for next year, he said the Philippine Stock Exchange index could reach 9,088 based on a price to earnings (P/E) ratio of 21x. This means investors will be willing to pay 21 times the amount of money they make. This year, the consensus earnings growth of around 15 percent is seen enough to propel the PSEi to 8,219 based on a P/E ratio of 21x.

“What will be a challenge to many companies in the Philippines is that for the last century, all strategies were Manila-based,” Oyson said, adding these companies would now have to look for growth opportunities in Visayas and Mindanao.

For their exposure to the goal of Duterte, BPI Securities favors indirect plays such as consumer and property stocks. They are seen to benefit companies out to win infrastructure projects under the public-private partnership (PPP) framework.

BPI Securities’ top picks are Jollibee Foods Corp., SM Investments Corp., SM Prime Holdings, Ayala Land Inc., Universal Robina Corp., Metro Retail Stores Group Inc., Century Pacific Food Inc. and D&L Industries.

“We believe infrastructure projects are typically low-return business. We also think there is risk that the winning bidder overpays,” Oyson said.

For those looking for direct infrastructure plays, BPI Securities favors Megawide Construction and Metro Pacific Investments Corp.

The brokerage house is also upbeat on the power sector. It is “underweight” (a recommendation to reduce position relative to a benchmark index) on banks and telecommunications.