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After a volatile 2016 comes another year of uncertainties

/ 01:04 AM December 29, 2016

The year 2016, which ran right into the year of the mischievous monkey in the Lunar calendar, is a period that many people couldn’t wait to end.  But the coming year could not be any different, experts said.

“It’s not clear where exactly will the chips lie,” said Philippine Stock Exchange president Hans Sicat, when asked about the prospects for 2017.

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Sicat, a former banker, sees a volatile curtain-raising for the market in 2017. Investors, he said, might have to wait until the end of January or February before making any educated guess on what lies ahead.

For Sicat, the biggest challenge now is the unpredictability of what lies ahead.

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“It’s so different from previous years when you would have an idea—like on what governments or even global central banks are signaling,” Sicat said, citing as examples the tapering of the US monetary stimulus and the normalization of the US interest rate policy.

A lot of the surprising developments seen in 2016 will continue to affect global markets in the years ahead.  There’s the “Brexit” or Great Britain’s exit from the European Union which was decided upon by the people via a referendum.  There is also the US under a new president, Donald Trump, who had issued protectionist and inward-looking policy pronouncements during the campaign season.

The world could be seeing a different trend from the economic integration and liberalization that benefited emerging markets in recent decades.

The year 2017 could be “more challenging” for corporate managers, said Jose Sio, chief finance officer at SM Investments Corp.

“If you look at what’s coming next year—it’s something that we should be careful of—all of us.  The peso is depreciating, interest rate is going up, stock exchange is down— from 8,000 to 6,000 (level) at present… We have this problem of nationalism in the US, Britain and the Middle East.  In North Korea, we don’t know what they are doing,” Sio said.

All these geopolitical developments, Sio said, were creating uncertainties.

“We should be watchful in the next six months… All these things will affect the Philippines, being a developing country,” he said.

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For corporations, Sio said the best thing to do would be to manage the uncertainties by keeping a healthy balance sheet and staying liquid. “If we are healthy and have a strong balance sheet, we’ll have opportunity—that’s more important.”

2nd year of decline

For the second straight year, the Philippine Stock Exchange index trended lower. At best, it may end flat versus last year’s level today, the last trading day of the year.

From 2009 to 2014, the PSEi nearly quadrupled. Last year, however, the PSEi closed at 6,952.08, down by 3.85 percent.

To at least wipe out the losses this year, the PSEi needs to rally today by 105.64 points from Wednesday’s close of 6,846.44.

Apart from external developments, domestic political noises are escalating in the aftermath of the last national elections. While it is largely the shift of funds from emerging markets back to developed markets that battered the Philippine stock market, some policy uncertainties have added to investors’ jitters.  More than the extra-judicial killings that have drawn concern from the international community, President Duterte’s anti-US rhetoric is adding pressure on investors.

“The first five months of the Duterte administration can be  considered a learning experience for investors,” said Citi analyst Edser Trinidad in a research note containing the house’s 2017 outlook.

He said the PSEi had slid from a high of 8,102 to its current level “due to concerns about off-the-cuff policy remarks of the President.”

But Trinidad said concerns about Duterte’s style of governance would be downplayed should the following reform agenda be implemented:

Tax reform

The first package, which is aimed for passage by 2017, will reduce personal income tax rates. To compensate for loss in tax revenue, the government sought to rationalize value added tax exemptions, impose tax on sugary products and increase the petroleum excise tax;

Rollout of stalled public-private partnership (PPP) and infrastructure projects; and

Structural reforms geared toward improving the competitive landscape, particularly increasing foreign ownership in certain industries a constitutional amendment.

In Citi’s bull case scenario, which posits the implementation of the tax reforms in their original form and the rollout of at least half of the planned PPP/infrastructure projects, Trinidad said the PSEi could trade at a price-to-earnings (P/E) ratio of 21.8x and target a new high breaching 9,000.  A P/E ratio of 21.8x means investors are willing to pay 21.8 times the kind of money they expect to make.

Citi’s base case scenario is that the tax reforms will be passed but only after a heavy revision by Congress.  This is seen to bring the index to 7,800.

Failure to make substantial progress on the reform agenda could leave the market trading at its historical P/E average, or an index level of 6,200, Trinidad said.

BPI Securities, for its part, is optimistic the PSEi could recover back to the 8,000 levels next year.

“I admit the political noise is heightening. However, I am optimistic that the financial and economic architects under the Duterte administration will be focused on delivering early next year package 1 of the proposed tax reform. It is safe to say that the final form may be diluted given the expected horse trading in Congress,” BPI Securities president Michaelangelo Oyson said.

Infrastructure Play

“The risk I see is that the proposed infra spend may not be as huge as initially envisioned given potential funding considerations. That is, we could be looking at a GDP growth rate in the 6-7 percent range instead of above 7 percent driven by a strong government spending. Consequently, the market thematic could tilt slightly from infra into more consumer-driven as the narrative shifts toward income redistribution,” he said.

During the Aquino administration, the local stock market’s strong performance was supported by the investment grade rating story.  Under the Duterte administration, investors are hoping that the promised “golden age of infrastructure” will be delivered and will provide a catalyst to the market.

Sicat said it would be quite important how the government’s fiscal numbers in January and February would come out—on whether it would be able to spend on infrastructure a higher proportion of the budget relative to GDP.

“That will be a strong signal that the infrastructure growth program is on its way because right now, we hear what they want to do but there are no numbers yet,” Sicat said.

If the government could deliver growth on infrastructure spending, Sicat said that would be the next biggest play for the Philippines,  one that will be enough to drown out other domestic political jitters.

Historically, he said, countries that had grown their economy via infrastructure spending  had been able to attract strong participation by global investors.  “The multiplier effect is massive,” he said. “Correlated with that would be hopes for improved peace and order situation.”

“We wish the government success because its success is our success.”

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TAGS: 2016, Business, Hans Sicat, Philippine economy, Philippine Stock Exchange, PSE
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