COL sees PSEi testing 8,400 next year

COL head of research April Lynn Tan

LEADING online stock brokerage COL Financial expects the local stock barometer to explore uncharted territory breaching 8,400 by the end of next year and continuing to perform well in the next six years.

In a press briefing on Monday, COL Financial head of research April Lynn Tan said the recent bombing in Pres. Duterte’s bailiwick Davao City – which prompted the declaration of a “state of lawless violence” – would only dampen sentiment in the short-term. “Over the long term, there’s no significant impact assuming this is put under control,” she said.

Although COL was much cautious on the stock markets six months ago, Tan said the risk factors highlighted at the start of the year failed to materialize while the country’s economic growth surprised positively.

At the beginning of the year, she said that most people were expecting the US Federal Reserve to hike interest rates – a development that could curb fund flows to emerging markets – four times this year. But as it’s turning out, she said the Fed was likely to raise interest rates by only once, if at all, this year.

“We expect the Philippine economy and the stock market to do well in the next six years under the new Duterte administration.”

The analyst said the Duterte administration had inherited a very strong balance sheet from the Aquino administration as well as a rich pipeline of infrastructure projects under the public-private partnership (PPP) framework that would only need to be executed. These consisted of 14 PPP projects in the bidding stage and five for National Economic Development Authority approval.

“The government also announced a vert action-oriented 10-point socio-economic agenda, showing plans on how it will capitalize on the numerous growth opportunities in the country,” Tan said.

COL’s favorite in Mr. Duterte’s 10-point agenda, she said, was the plan to hike infrastructure spending to at least 5 percent of gross domestic product (GDP).

Tan also noted that in 2015, the country just entered the demographic window, a period of rapid economic growth driven by entry of majority of the population into working age. Such period of rapid economic growth as a result of demographic dividends is expected to last for 40 years or until 2055.

The Philippines is also seen less vulnerable to external developments, being large a domestically-driven economy. Furthermore, Tan said the country had a significant room to grow investments coming from very low levels compared to peers in Southeast Asia.

Nonetheless, Tan said the market was vulnerable to a correction in the short-term. “Given the Duterte administration’s plan to cut taxes and increase spending on infrastructure, there is a possibility that the country’s budget deficit would balloon and this could lead to a downgrade in the country’s credit rating,” Tan said.

At the same time, she said valuations were no longer attractive, as investors were now paying 20 times the amount of money they expect to make this year.

“Moreover, potential upside to our end-2017 target of 8,400 is limited. This makes the market vulnerable to sell-offs assuming that companies come out with disappointing earnings results. It also increases the likelihood of share placements as companies take advantage of their high levels of valuation,” Tan said, adding that government spending may also grow at a slower pace in the short-term as the new administration would still be in an adjustment phase as what usually happens when there is new leadership.

For the second half of the year, COL chief technical analyst Juan Barredo said that as the PSEi had recently broken below its seven-month trend-line, a “corrective” consolidation was activated.

Barredo said short-term rallies may be limited to 7,950-8,055 with some possibilities of revisiting the PSEi’s all-time high of 8,136 near this yearend.

COL’s key stock picks are in line with infrastructure, tourism and consumer themes. on infrastructure, it favors Metro Pacific Investments Corp. as well as top leaders BDO Unibank and Metropolitan Bank & Trust Co. For tourism – which is seen to benefit from 5 airport PPP projects in the pipeline- COL’s top picks are Cebu Air, Ayala Land Inc. and Robinsons Land Corp. On the consumer theme, its favours SM Investments, D&L Industries, Century Pacific Food and Concepcion Industrial Corp.

On rotation to smaller caps, COL favors East West Bank and EEI Corp. while those seen to benefit from recovering coal prices globally and stricter environmental regulations locally were First Gen Corp. and Energy Development Corp.