BDO Nomura sees PSEi rising to 9,100 next year

Stock brokerage BDO Nomura is bullish on the Philippine stock market, projecting a rise in the local stock barometer to a new high of 9,100 by next year on expectations of faster corporate earnings growth.

In a press briefing on Monday, Nomura senior economist for Southeast Asia Euben Paracuelles said the Philippine infrastructure story would continue amid a still “pretty solid” growth trajectory and supportive external backdrop.

Despite rising inflation and interest rate, BDO Nomura Securities research head Dante Tinga Jr. said the outlook for the stock market was still bullish as index-weighted core earnings per share in the Philippines would likely surge to 13.9 percent next year compared to just 5.3 percent this year.

“The acceleration in earnings growth should more than offset the risks associated with rising inflation,” Tinga said.

Nomura sees Philippine inflation rising next year to 4.3 percent from 3.2 percent this year – higher than market consensus and also exceeding the central bank’s 2-4 percent target range – partly due to the pick-up in oil prices and pressures for an economy that’s rising faster than its potential, Paracuelles said. The economist said this would likely prompt the Bangko Sentral ng Pilipinas to jack up interest rates by a total of 100 basis points or about 25 basis points every quarter next year.

On the other hand, Nomura sees the Philippine economy expanding by 6.9 percent next year, upgrading its forecast from 6.8 percent earlier. This year, growth is seen to average at 6.7 percent for the full year.

Paracuelles stressed, however, that the Philippine economy was not overheating. “We know that lending growth has been very fast and the current account has moved from surplus to deficit. These are normal signs that textbook economics will tell you it’s overheating. What’s different in Philippines is this is an investment-driven pick-up in growth. This is not a consumption binge that has been financed by an accumulation of debt,” he explained.

The Philippines, along with India and Indonesia, belongs to a “small club” of countries with strong growth prospects and likely to be Asia’s rising tigers, the economist said.

Tinga said from 8,300 this year, the Philippine Stock Exchange index would likely reach 9,100 next year, led by the outperformance of banking, property and industrial counters.

Top stock picks by BDO Nomura from its favored sectors are: Ayala Land, Bank of the Philippine Islands, International Container Terminal Services Inc., Jollibee Foods Corp., Metropolitan Bank & Trust Co., Petron Corp., Semirara Mining & Power, Shakey’s Pizza Asia Ventures, SM Prime Holdings and Wilcon Depot.

BDO Nomura expects investors to pay 19.6 times the kind of money they expect to make in 2018 compared to a price-to-earnings (P/E) ratio of 20.5 times this year. Equities are seen to trade at a premium but still below the peak P/E ratio of 19 to 20 times.

Upside risks are seen to come from the execution of infrastructure-building and the tax reform package.

On downside risks, Tinga said it’s inflation – not current account or fiscal deficits – that was likely to be the biggest concern from an equities and stock-picking point of view. Other risks are seen to come from the slowdown in the business process outsourcing (BPO) sector, a key economic driver in recent years, alongside possible delays, dilution and reversal of reforms under the Duterte administration.

Paracuelles sees a generally favorable environment for emerging markets next year but noted some external risks arising from the slowing growth in China and rising trade protectionism while geopolitical risks such as tension in North Korea were not likely to be as significant.