Tax reform seen to push PSEi beyond 8,000

Enacting the tax reform program this year is the key catalyst that would bring the Philippines to a new economic “supercycle” that could lift the main stock barometer beyond the 8,000, the chief of BPI Securities said.

Michaelangelo Oyson, in an investors briefing last week, said while the economy had expanded by over 6 percent in the last six years, growth could accelerate closer to 9 percent if Mr. Duterte is able to deliver the tax package.

While the first package of the Duterte administration’s tax reform program seeks to lower personal income tax and estate donor taxes, it also expands the coverage of the value added tax, increases the tax rates on automobile and updates excise tax on oil alongside other complementary revenues. Net yield in revenue is estimated at P162.5 billion, in turn seen boosting the government’s bid to usher in a golden age of infrastructure.

“The government spending is an important factor in growing this economy. If you want the stock market to move higher, we need the tax reform package and we need the infrastructure package including the airports (modernization program),” Oyson said.

Without the tax package, Oyson said the domestic economy would continue growing closer to 6 percent. However, he said PSEi won’t hit 8,000 because infrastructure spending was hinged on this tax reform program. Having said, he expressed optimism that the tax package could be legislated by the second half of this year.

“So the outlook is very positive for the Philippines,” Oyson said. “As I said three years ago, we are still in a supercycle and if Duterte delivers on his reforms for the Philippines, we will enter the supercycle part two,” Oyson said.

It’s attainable for the index to return to the 8,000 level but it’s not going to be a straight line moving up, which means investors have a chance to buy every time the market pulls back, Oyson said.

While last year, the “bartender” in global financial markets was US Federal Reserve chair Janet Yellen, Oyson said this year, investors would need to monitor the actions of the new US president Donald Trump.

“Donald Trump is our bartender for this year. He’s the guy who will take out the punch bowl so the party will end but he will come back and refill the punch bowl,” he said.

This year is seen to be a battle between Duterte and Trump, as far as stock market influence is concerned. “Duterte is passing all these major reforms but the flows to the stock market will be determined by Donald Trump,” Oyson said.

If Trump pushes for a strong US dollat but is able to match the strengthening of the greenback with a stronger US economy, Oyson said this would lift the global economy, bringing back flows to the Philippines.

BPI Securities’ head of research Haj Narvaez sees the PSEi’s fair valuation by yearend at 8,200, adding however that there could be volatility in the next three to six months. Any pullback, he said, won’t likely go deeper than 6,700.

“The healthy macroeconomic picture would limit downside for the market and given the market’s attractive valuations and with potential tailwinds from the passage of the tax reform package as well as higher fiscal spending the market would likely rally in the second half of 2017 and potentially breach the 8,000 level,” Narvaez said.

This year, BPI Securities sees average corporate earnings per share growing by 9.4 percent, easing from around 12.2 percent last year.

BPI Securities’ favored sectors include retailing and power sectors. Its top stock picks as Ayala Land, Jollibee Foods Corp., Puregold Price Club Inc., Robinsons Retail Holdings Inc. and Semirara Mining and Power Corp., Narvaez said.

For those who are unsure what to buy, Oyson’s suggestion is to accumulate Ayala Corp. or SM Investments Corp., adding these conglomerates would give the investors exposure to their various operating units and were behaving like index funds. So it’s just a matter of choosing whether one likes to have Jaime Augusto Zobel de Ayala or Teresita Sy-Coson as one’s fund manager.