Stock index seen pulling back to 8,400 level

The Philippine Stock Exchange index (PSEi) may pull back to a “more rational” range of 8,400 to 8,500 this year in the absence of major catalysts comparable to the tax reform program that fueled last year’s upswing, the new chief of China Bank Securities (CBSec) said.

CBSec’s PSEi outlook is based on the five-year average price-to-earnings (P/E) ratio of 18x, which means investors are willing to pay 18 times the kind of money they expect to make from the companies in this equities basket.

“From a technical standpoint, the index appears to be entering a stage of mania and could rally above 19x P/E,” CBSec president and chief executive Marisol Teodoro said. “However, in the absence of a catalyst with a similar magnitude as the TRAIN (Tax Reform for Acceleration and Inclusion) Law surfacing this year, we won’t likely see valuations as high as what we’ve seen in 2017.”

The first package of TRAIN, enacted by Congress before end-2017 and which took effect this year, lowers and simplifies personal income taxes, simplifies estate and donor’s taxes, expands the value-added tax (VAT) base, adjusts oil and automobile excise taxes, and introduces excise tax on sugar-sweetened beverages.

Last year, investors accepted a P/E ratio of about 19.5x, allowing the PSEi to break out of the 8,000 barrier after a three-year attempt. The PSEi gained 25 percent last year to close at 8,558.42.

“There could be more risks this year, judging by last year’s rally, it seems investors have priced in the bull case so any disappointment as reflected in company earnings could be met with a selloff,” Teodoro said.

“There is also relatively little visibility with respect to TRAIN package 2 so it is hard to say what incentives will be scrapped and which sectors will be affected,” she said.

Based on recent reports, TRAIN package 2 proposes to gradually lower the corporate income tax rate from 30 to 25 percent while modernizing incentives for companies to make these “performance-based, targeted, time-bound and transparent.” The package is designed to be revenue-neutral.