Why the stock market could break 8,000 next year

The local stock barometer may return to the 8,000 level in the coming year as corporate earnings rebound sharply with the further reopening of the domestic economy alongside a sustained dovish monetary policy setting, according to an investment expert from Sun Life.

At a press briefing last week, Sun Life of Canada Philippines chief investments officer Michael Gerard Enriquez said corporate earnings in the coming year could rebound by 45 percent, led by the consumer discretionary, real estate and industrial sectors.

From January to September this year, the 30-member Philippine Stock Exchange index (PSEi) suffered an average earnings decline of 38 percent. Three index companies turned unprofitable, while four managed to defy the downturn.

Sun Life’s PSEi target of 8,000 is based on a “bottoms-up” approach, or the projected valuation of individual companies in the basket.

“Definitely, there’s a lot of room for a huge recovery for next year, although from where it is at the moment, 7,200 to 8,000 is still a very attractive gain for the index,” Enriquez said.

After breaking into the 7,000 level in recent weeks due to favorable news on COVID-19 vaccine developments, Enriquez said the next resistance would be the 2019 base of 7,500.

He said the PSEi was currently at overbought levels and thus, a healthy correction would be possible in the near term.

Looking at the coming year, Enriquez said the local equity market would continue to benefit from a low interest rate environment. He believes after slashing policy rates by a total of 200 basis points this year, the Bangko Sentral ng Pilipinas (BSP) might do another cut.

As such, equities would outperform bonds as an asset class next year as investors chase better yields, he said.

Based on the index target of 8,000 and the earnings growth forecast of 45 percent, Sun Life expects investors to be willing to pay 20 times the kind of money they expect to make. Given that the market had traded at an even higher premium in the past, Enriquez said this price to earnings ratio would be justifiable.

In the last 15 years, however, Philippine stocks have traded at an average of only 15 times the projected earnings.

If earnings growth would make a surprise on the upside, Enriquez said the PSEi could even perform better.

Consumer discretionary stocks could post an average 167-percent growth in earnings this 2021, Enriquez said, citing key examples like fast food giant Jollibee Foods Corp., integrated gaming resort Bloomberry Resorts and liquor-maker Emperador Inc.

Sun Life expects the property sector to grow earnings by 59 percent this year as the reopening of the economy revives tourism property while business process outsourcing may take up the slack for online gaming operators, according to Enriquez. Another sector that tracks economic cycles, the financial sector, is seen to grow earnings by 27 percent next year.

The communications sector, one of the few pandemic-proof sectors as demand for connectivity rose during the lockdowns, could also continue growing earnings by an average of 24 percent in 2021.

The consumer staple segment, another resilient sector, is expected to sustain an earnings growth of 8.5 percent next year. —DORIS DUMLAO-ABADILLA INQ