This 2018 is a year that most people could not wait to be over.
It will be remembered for skyrocketing consumer prices triggered by the upsurge in oil prices and the shortfall in rice supply linked to inefficiency issues at the government agency tasked with ensuring adequate supply of the staple. Rising inflation, in turn, prompted the Bangko Sentral ng Pilipinas to jack up its interest rates five times for a total of 175 basis points (equivalent to 1.75 percentage points).
Overseas, US-China trade jitters escalated for most of the year. The US Federal Reserve, for its part, continued its interest rate “normalization” policy, which increased interest rates from record lows. The Philippines—erstwhile a market favorite—became out of flavor as the uptick in inflation spurred overheating worries.
The main-share Philippine Stock Exchange index (PSEi) saw its worst performance since 2008. For the full year, it lost a total of 1,092.4 points or 12.8 percent from the closing level of 8,558.42 in 2017, a reversal of the 25.1 percent market gain in the previous year.
“We just feel glad that 2018 is coming to a close,” BDO president Nestor Tan said in a recent gathering. Tan said it was best to look at 2019 with optimism.
“With the 2018 we had, I don’t think 2019 can be much worse. It’s only one of two things. Either it gets better or you’ll get used to it. Either way it’s going to feel lighter,” Tan said.
The CEO of the country’s biggest bank may have said this in jest during a Christmas gathering for the media, but given the challenges faced by the country in 2018, he was serious when he shared some optimism for 2019.
Heavyweights
“Despite reversing capital flows continuing to provide overall headwinds for equities, we believe shifts in other macro themes could benefit Philippine stocks. We remain positive on property and banks and add select consumer names to our growth-oriented stock-picking strategy, particularly if inflation concerns ease,” BDO Nomura said in a yearend research note on equities strategy.
Although the PSEi has pulled back sharply from the all-time highs in January, BDO Nomura said the PSEi might recover to 8,300 over the next 12 months, underpinned by index heavyweight property and bank stocks. These are the sectors that delivered solid third-quarter earnings results.
BDO Nomura’s stock-picking strategy is “find safety in growth” and apart from property and banks, this strategy favors select consumer names.
“The consumer sector in general enjoyed a better-than-expected third-quarter reporting season, and a stabilizing (if not softening) inflation environment may result in more positive surprises going forward,” the research said.
In terms of core earnings-per-share growth forecast, BDO Nomura sees an increase in 2019 of 11 percent, better than a projected 7-percent expansion in 2018. After a third-quarter earnings results season that generally met expectations, BDO Nomura remained cautious toward most other sectors, although it recognized that oversold conglomerate stocks might enjoy a bounce if overall risk aversion eased.
Better 2019
While external factors may remain uncertain, the Philippine equity market looks forward to a rebound in 2019 based on positive local developments, First Metro Investment Corp. and the University of Asia and the Pacific said in a joint research note.
“The rapid deceleration of domestic inflation, erasure of crude oil gains in 2018, election spending, and continued ramping up of infrastructure and capital goods spending point towards resiliency in domestic demand and better earnings prospects,” it stated.
Global macro themes may favor the Philippines again. Despite reversing global capital flows, the Nomura Global economics team argued that the risk of a Philippine exchange rate crisis was remote.
“Also, the Philippines appears relatively well positioned in an environment of escalating US-China trade tensions and falling oil prices,” BDO Nomura said.
Inflation is seen to be less of a concern in 2019.
“Declining energy prices should translate to a broad range of benefits for Philippine equities. Note that falling oil prices should result in a lower import bill, easing concerns on the current-account deficit and thereby reducing pressures on the Philippine peso,” BDO Nomura said.
In its policy meeting in December, the inflation-targeting BSP had kept its interest rates unchanged.
The latest policy decision is in line with our outlook on monetary policy [that] the BSP will keep the policy rate at 4.75 percent from now until the end of 2019. The November inflation print confirms that headline inflation has taken a turn and is likely to head back to the central bank’s target by June next year given the decline in oil prices. Hence, the pressure to raise interest rates has gone down significantly,” said a research note written by a team of Bank of the Philippine Islands economists led by Emilio Neri Jr.
Neri’s team believed that a cut in the the BSP’s policy rate in the next 12 months might be premature, noting that the “BSP needs to replenish its gross international reserves and will need to keep the policy rate steady to anchor the exchange rate against potential portfolio outflows in 2019.”
Over the medium term, BPI said it expected the peso to continue weakening against the US dollar as the country’s trade deficit would remain high, given the additional depreciation pressure led by massive capital goods spending by both the private and public sectors.