Favorite sectors for 2019

One of the most popular questions we get every new year is “which sectors do you expect to do well this year?” For 2019, we have four favorite sectors namely consumer, banking, cement and airlines.

2019 will be a good year for consumer companies. The peaking of inflation late last year will help improve consumer confidence which in turn should result in higher spending. Lower inflation will also help boost margins of consumer companies as costs of raw materials remain relatively stable.

The timing of the mid-term elections in 2019 will also benefit consumer companies as campaign spending should help boost spending on non-discretionary items like groceries and fast food.

We also expect 2019 to be a good year for banks. Although we anticipate higher interest rates to lead to slower loan growth, higher interest rates will also allow banks’ margins to improve. This as a bigger share of loans are repriced higher compared to deposits. This is especially true for the bigger banks which have a larger pool of low-cost current and savings account deposits that are not repriced higher even with higher rates.

Moreover, although interest rates this year are higher compared to last year, rates on longer-term papers such as 10-year bonds have gone down significantly from their peak levels in the second half of last year, thanks to lower inflation. This in turn should allow banks’ trading gains to recover as falling rates lead to higher bond prices.

Banks may see their funding costs go down as the BSP may resume cutting banks’ reserve requirements this year due to lower inflation. Lower reserve requirements should increase the amount of funds that banks can lend out without them having to increase rates to attract more deposits.

We also expect the cement sector to do well in 2019. Demand for cement is expected to remain strong this year given the continuous increase in government spending on infrastructure and the strong growth in private construction spending. Although demand for cement has been strong the past few years, this did not translate to higher profitability for cement companies as selling prices remained depressed due to the influx of cheap imports. Nevertheless, this is expected to change in 2019 after the Department of Trade and Industry slapped an P8.40 per bag duty on imported cement which is equivalent to a 4-percent increase in price. This in turn should make locally produced cement more competitive and reduce the pressure for prices to go down.

Aside from better selling prices, costs of cement companies should go down given the drop in oil and coal prices in the international market. Note that fuel and power account for around 45 percent of cement companies’ costs of goods sold. Lower costs coupled with better selling prices should lead to a significant improvement in margins and profitability of cement companies.

Finally, airlines should do well in 2019. Demand for travel has always been very strong in the Philippines. However, the weaker peso and higher oil prices have resulted to costs growing faster than revenues. Note that around 65 percent of airlines operating expenses are dollar denominated. Nevertheless, after depreciating substantially last year, the peso is finally stabilizing, thanks to the weak dollar. Oil prices have also gone down after increasing for the most part of 2018.

Given the favorable outlook of consumer, banking, cement and airline sectors for 2019, it is not surprising then that a lot of stocks belonging to the said sectors have done well so far this year. However, it is not yet too late as some less liquid, smaller capitalized stocks belonging to the four sectors are still trading at attractive valuations. Corrections also create opportunities to buy consumer, banking, cement and airline stocks at cheaper valuations.