Time to shop for stocks

The Philippine Stock Exchange index (PSEi) failed to stay above bull market territory, closing last week at 7,854.39 which pulled down its year-to-date gain to only 5.2 percent from a high of 12 percent.

Nevertheless, we remain bullish on the Philippine stock market for the following reasons:

No repeat of global financial crisis. One of the key risks facing the Philippine stock market is the poor performance of the US stock market.

In the past two weeks, the PSEi fell by 4 percent, triggered by the steep drop in the S&P 500 as trade tensions between the United States and China escalated.

Despite the spat between the two economic giants and the abundance of indicators pointing to a continuous deterioration of global economic conditions, we are not anticipating a repeat of the 2007 to 2008 global financial crisis. In fact, the probability of a recession in the United States is only 34 percent based on Bloomberg consensus estimates.

The reasons why we don’t expect a repeat of the major financial meltdown include lower debt levels of US households, stronger banks and the absence of leverage- induced bubbles such as the 2007-2008 housing bubble.

Consequently, although a steep correction of the US stock market is possible, the likelihood that it will collapse by 52 percent and drag the rest of the world with it, similar to what happened in 2007 to 2008, seems remote.

Philippines less vulnerable to US-China trade war. As discussed in the past, the Philippines was less vulnerable to the squabble because we were not an export-oriented country. In fact, the Philippines and other Southeast Asian countries are expected to benefit from the ongoing trade war as we are expected to get investments from companies looking to diversify away from China.

This might be the reason why the Duterte government is prioritizing the passage of all remaining tax reform packages by 2020 as these would boost the Philippines’ competitiveness in attracting foreign investments.

Domestic economic conditions more positive than negative. The Philippines’ economic growth outlook is very positive. Although gross domestic product (GDP) growth during the first half of the year slowed to only 5.5 percent, this was largely due to slower government spending. Nevertheless, the government finally passed the delayed 2019 budget in April, paving the way for faster government spending growth in the second half of the year.

Also expected to drive growth is lower interest rates. After increasing sharply last year, inflation is now back to the Bangko Sentral ng Pilipinas’ (BSP) target range of 2-4 percent as both rice and oil prices have gone down.

In response, BSP cut its benchmark rate by a total of 50 basis points and banks’ reserve requirement ratio (RRR) by 200 basis points for the year-to-date period. BSP Governor Benjamin Diokno said the central bank could cut rates by another 25 basis points in September and banks’ RRR by another 100 basis points by yearend.

Corporate earnings not as bad as expected. Although there were a handful of listed companies that disclosed much weaker than expected earnings during the first half of the year, there were also several companies that finished strong.

For example, all banks enjoyed double-digit earnings growth driven by a combination of higher trading gains and higher net interest income as demand for loans remained healthy. Property companies also delivered double-digit earnings growth driven by the higher rental revenues and higher completions of ongoing residential projects.

Some companies were even surprised as they benefited from company-specific reasons while listed restaurants showed faster revenue growth in the second quarter compared to the first quarter.

Although the Philippine stock market would most likely stay volatile in the next few weeks, we remain confidently bullish. Nothing has changed fundamentally since the PSEi hit its year-to-date high of 8,400 earlier this July that would warrant a change in our view on the Philippine economy and the stock market.

As such, the ongoing correction should not be feared but instead viewed as an opportunity to buy stocks at cheaper valuations.