Package 2 of TRAIN helps boost confidence in stock market

The local stock barometer can continue its trek to new highs and breach the 10,000 mark in the next few years as bulls will feed on synchronized global economic growth alongside higher local corporate earnings and infrastructure spending, fund management firm Philequity Management Inc. said.

In an investors briefing on Saturday, Philequity vice president Miguel Agarao said the catalysts behind the bull market —which was now running on its ninth year—were still at play.

“The two things that can kill a bull market are not happening. You do not have a recession and you do not have a credit crisis,” Agarao said, referring to the favorable global economic environment.

At the same time, he noted that local corporate earnings growth was accelerating. This year, companies under the Philippine Stock Exchange index (PSEi) are expected to grow their earnings by an average of 12 percent.

The fiscal reforms being undertaken by the government will also bring the economy to a higher growth trajectory, similar to what happened in the United States.

“When we get our own set of tax cuts in package 2, that should be very good for stocks as well,” Agarao said.

Package 1 of Tax Reform for Acceleration and Inclusion (TRAIN)—which was passed last yearend and has taken effect this year—lowers and simplifies personal income taxes, simplifies estate and donor’s taxes to compensate for forgone revenues, expands the value-added tax (VAT) base, adjusts oil and automobile excise taxes, and introduces excise tax on sugar-sweetened beverages.

TRAIN’s 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 infrastructure spending program, in line with the “golden age of infrastructure” promised by the government, will also be a big boost to the Philippine gross domestic product (GDP), Agarao said. This can perk up the country’s GDP to an annual growth rate of 7 percent after sustaining an annual growth of over 6 percent in the last six years.

Before tax reform, Philequity’s PSEi target for this year would be at 8,895 based on an average price to earnings (P/E) multiple of 18.5 times 2018 earnings, which is in line with the six-year average. With tax reform finally passing, Agarao said higher valuations could bring the index to 9,401 this year.

“It’s only a matter of time before we go back to 9,000 and go to 10,000 because the bull market is still alive,” Agarao said.

During the open forum, Philequity director Wilson Sy said his best guess was that the PSEi could reach the 10,000 mark in the next two years.

But there are a couple of global and local risks that investors have to watch for, Agarao said. Locally, risks include a sharp depreciation of the peso arising from the twin (current account and fiscal) deficits and narrowing interest rate differential with the US and the massive equity offerings which can siphon off liquidity.

The premium that investors will pay for local equities will also depend on how fast and how consistent the government will be in delivering its infrastructure-building program.

Globally, the risks include US inflation surprises, further bloodbath in the US stock markets, the Italian elections which may thrust into power a leader that advocates exit from the eurozone and the unwinding of other derivative-based funds. Though unlikely to lead to a contagion, Agarao said a sharp plunge in these assets might lead to further market volatility. —DORIS DUMLAO-ABADILLA