Heightened regulatory risks, environmental uncertainties spurred by Taal Volcano’s eruption and the shrinking weight of the Philippine market in key emerging market indices are taking a heavy toll on local stocks, but now is the time for the patient investor to come in, analysts at leading online stockbrokerage COL Financial said.
To date, the main-share Philippine Stock Exchange index (PSEi) has yet to find its bottom and is decoupling from the rebound seen by other emerging markets.
In a briefing on Tuesday, COL chief technical analyst Juanis Barredo said the PSEi was now testing major support levels and would need to stay afloat 7,475 to 7,500 and break past 7,900 in order to catalyze a rally toward 8,200 to 8,400. This best case scenario has a 30-percent probability, he said.
Otherwise, he said the index might sway down between 7,200 to 6,824.
Barredo sees only a 20-percent probability of things turning too gloomy that would drag the PSEi toward 6,800, the worst scenario so far.
COL’s base case scenario, with a 50 percent probability, is that the PSEi would consolidate in a lower channel, finding support at 7,000 then rallying toward 7,500.
The bears have yet to take control of the local market as the PSEi has not yet fallen by 20 percent from its high of 9,058.
On a fundamental basis, COL head of research April Lynn Lee-Tan said the 2020 outlook continued to be favorable, given that the 2020 national government budget had been passed in time, the Bangko Sentral ng Pilipinas has room to ease monetary policy, faster earnings growth, cheap local equity valuations and improving global economic outlook.
COL expects the component companies of the PSEi basket to grow corporate earnings by 12 percent this year, faster than the estimated growth of 8 percent last year, driven largely by the consumer, power, property and telecom sectors.
However, Tan said foreign investors continued to avoid the Philippines partly due to regulatory risks–referring to President Duterte’s tirades against Metro Manila’s water concessionaires and the pending review of other contracts. The worst-case scenario is if the government would come up with unreasonable new contracts and nationalize water concessions and confiscate other projects with so-called “onerous” contracts. She said this could lead to a downgrade in sovereign credit ratings. Given the government’s aggressive infrastructure build-up program, she noted that it could not afford to have any credit-rating downgrade since this would constrain the government’s ability to borrow.
“But we are not expecting the worst,” Tan said. “We know that our economic fundamentals are very good, valuations are very cheap, risks are significant but will eventually be resolved, although we don’t know when that will happen and how low the market will go, so it’s hard to pull the trigger.”
For investors, the best strategy will be to stay invested and manage the risks, she added. While it’s difficult to expect gains in the short-term, investors will have to keep a long-term perspective and limit the size of their investment.
Citing investment guru Warren Buffet’s aphorism that the stock market is a device for transferring money from the impatient to the patient, Tan said that “for the patient investor, now is the time to invest.”
Likewise in reference to Buffet’s often-quoted advice to “be fearful when others are greedy and greedy when others are fearful,” Tan said, “definitely now is the time to be greedy.”
Tan said the four possible catalysts for the PSEi’s rebound would be the drafting of water concession contracts that would favor both the private and public sectors, an objective evaluation of so-called “onerous” contracts, franchise renewal for beleaguered broadcasting giant ABSCBN and waning of Taal Volcano’s activity. INQ