PSEi seen to hit new highs

The local stock barometer is seen to probe new highs past 9,300 next year as corporate earnings catch up with stock valuations and as the government’s tax reform program ushers in a new virtuous cycle for the Philippines.

April Lee-Tan, head of research at leading online stock brokerage COL Financial, said in an interview at the sidelines of COL’s mid-year market briefing for premium clients on Saturday that the Philippine Stock Exchange index could climb by at least 8 percent next year from COL’s revised forecast of 8,700 for the end of this year. This suggests a PSEi outlook of 9,396 for next year.

The PSEi outlook for 2018 is in line with expected pace of growth in corporate earnings.

“At worst, there’ll be an 8 percent EPS (earnings per share) growth forecast for 2018,” Tan said. “It’s a little bit slow, but if you think about it, the major difference is that fundamentals have caught up with prices.”

As such, Tan said next year’s surprises would likely be more on the upside.

During the investors briefing, Tan said that in the two times that the PSEi breached the 8,000 level, there was an “overshoot” of share price relative to EPS growth.

“I know that earnings growth has not been exciting in the past few years but … even with say 5, 6 or 7 percent (EPS) growth, your earnings will eventually catch up and now, we are finally catching up,” Tan said.

At the same time, Tan noted that global risks have abated. “We’re seeing synchronized global growth for the first time in a long while,” Tan said. This much improved global economic environment has in turn supported growth in the country’s export earnings and remittance flows.

Another catalyst is the expected legislation of the tax reform program this year. This is seen to put 20 percent more money in most people’s pockets (as reduction in personal income tax is seen to benefit 90 percent of taxpayers), while infrastructure spending is seen to rise to 7 percent of gross domestic product (GDP) by 2022 from 4 percent this year.

As a macro effect, the country’s GDP growth is targeted by the government to accelerate to 7-8 percent. “I think it can be done,” Tan said. “The best part is it will happen without us going beyond the 3 percent [to GDP] deficit cap which could lead to a ratings upgrade and another virtuous cycle for the economy.”

“A virtuous cycle is when you can borrow cheap, you can grow economy faster. Inflation is low, peso is stable,” Tan said, noting this was an opposite of the vicious cycle seen by the Philippines before the government’s fiscal position was stabilized by the increase in the value added tax rate to 12 percent at the twilight of the Arroyo administration.

On the corporate sector, Tan said there had been an improving picture, with a lot of positive surprises particularly in the gaming, telecommunication, consumer, financial and property sectors.

COL’s top stock picks are property firms Megaworld Corp. and Ayala Land Inc., Metropolitan Bank and Trust Co., multiformat retailer Robinsons Retail Holdings Inc., integrated gaming resort operator Bloomberry Resorts Corp., Manila Electric Co. and Semirara Mining and Power Corp.

Among smaller cap or less liquid stocks, COL’s favored stocks are Vista Land & Lifescapes, East West Bank, Union Bank of the Philippines, Melco Resorts Philippines and Integrated Micro-Electronics Inc.

In the case of Metrobank, Tan said she was not too worried about the recent internal fraud discovered in the bank. At worst, she said this would reduce the bank’s equity by only 1.2 percent.

“Its position as one of the big three banks makes it a major beneficiary of growing demand for loans,” Tan said.