Exchange seen posting new highs

Leading online stock brokerage COL Financial sees the local stock barometer breaking into new highs soon and ending the year at 8,700 on a string of favorable developments here and abroad.

But over the short-term, the Philippine Stock Exchange index would likely pull back as investors align their portfolios with the inclusion of China A shares in the MSCI Emerging Markets Index, COL said in a research note issued on Friday.

“To make room for the Chinese shares, the index weights of other emerging markets, including the Philippines, will be reduced, triggering a sell-off,” COL said.

China’s A shares refer to shares that can be made available only to select foreign institutions that meet the criteria set under the strict quota system of the Chinese government. These shares represent about half of the Chinese stock market. The other half is easily accessible to foreign investors.

Apart from the dampening impact of the inclusion of the China A shares into the MSCI, COL pointed out that historically, August was a weak month for the Philippine stock market.

Nevertheless, COL said the weakness brought about by the said factors was not likely to last long.

“The sell-off in emerging markets resulting from the inclusion of China A shares in the MSCI Emerging Markets Index should stop once funds are already compliant with the new index weights,” COL said.

Although the month-on-month return of the PSEi was often negative in August, the average return six months later was positive at 4.5 percent, based on historical performance, COL said.

“That said, investors should take advantage of any correction in the short-term to accumulate stocks as this could be the last time for the PSEi to trade below 8,100 before it breaks out to much higher levels,” COL said.

COL now believes there’s strong likelihood that the PSEi would successfully break above the 8,100 resistance soon after two failed attempts in the past.

COL’s more optimistic outlook was attributed to “the improving global economic outlook, approval of the much-awaited tax reform bill and the diminishing headwind facing numerous sectors.”

The Philippine House of Representatives recently passed the first phase of tax reform package certified by Pres. Rodrigo Duterte as an urgent piece of legislation. This package simplifies and lowers personal income tax rates while broadening value-added tax coverage, rationalizing estate and donor’s tax and adjusting oil and automobile excise taxes.

In February, COL Financial had said that the PSEi’s fair valuation was only at 7,500.

To reflect its improving outlook of the economy and the various sectors, COL has reduced its risk premium assumption by 50 basis points to 5 percent after raising it in October 2015.

“Coupled with the adjustments in our fair value estimates for SM Prime Holdings and SM Investments Corp., our new end-2017 target for the PSEi is 8,700,” COL said.

Since the start of the year, the PSEi has so far rallied by a total of 973.53 points or 14.2 percent from the end-2016 closing of 6,840.64.