Expected vaccine rollout, return of foreign funds fuel stock market optimism

Local stocks are no longer cheap but they have more room to go up this year as the rollout of the COVID-19 vaccine will hasten economic recovery and they still offer better yields than bonds in this low-interest rate environment, leading online stock brokerage COL Financial said.

COL expects the Philippine Stock Exchange index (PSEi) to end the year at 8,300, based on a bottoms-up approach in valuing component companies, COL head of research April Lee-Tan said in a briefing on Thursday.

Average earnings per share are projected by COL to grow by 39 percent this year coming from a low base last year, when full-year earnings likely contracted by 39 percent. Howe­ver, this will still be around 15 percent lower than average earnings in 2019 or before the pandemic struck, Tan said.

‘Not very attractive’

Local stocks are likewise seen to eventually benefit from a rotation of global funds to emerging markets, regardless of fundamentals and valuations. For now, however, foreign funds have been staying out of the market, resulting in greater volatility and preference for smaller cap and speculative stocks.

“The Philippines’ 2021 economic outlook is not very attractive given the poor outlook for consumer and business spending, and delays in the passage of tax cuts. However, the stock market can still go up on hopes that the availability of COVID-19 vaccines will help economic conditions norma­lize faster,” Tan said.

“Moreover, valuations of stocks are still reasonable given low interest rates. Finally, there is an ongoing rotation [of funds from developed markets] to emerging markets,” she said. Emerging markets also stand to benefit the most from the availability of vaccines, rising commodity prices and the weak dollar, she added.

Even with the recent correction, local stocks are trading at about 19 times projected earnings—more expensive than the 10-year average valuation of about 17.8 times earnings and this is turning off some fund managers, Tan said.

Reasonably priced

But while they have become expensive, local stocks are still reasonably priced versus bonds, Tan said. To date, PSEi yields are seen 2 percentage points better than 10-year bond yields.

With the PSEi now showing some corrective stress, the market may go into a “controlled correction” or consolidation between a high of 7,500 and the support level of 6,400-6,700, which could present better buying opportunities for mainline stocks, COL chief technical analyst Juan Barredo said.

Tan said foreign funds would eventually flow back to emerging markets, which have shown better management of COVID-19 cases. ­At the same time, she said cyclical companies would benefit more from the rollout of vaccines while emerging markets would benefit from rising commodity prices and weakening of the dollar.

For 2021, COL’s top stock picks for investors chasing yields are PLDT, Globe and AREIT, which have an estimated dividend yield of 5.4 percent, 4.9 percent and 5.6 percent this year.

Cyclical companies that are seen to play catch-up are BDO Unibank, Metrobank, GT Capital and Metro Pacific Investments.

Meanwhile, Megaworld is expected to unlock value through real estate investment trusts (REITs).

The second tier of stocks favored by COL are: Meralco (for those searching for yields); Security Bank, Eagle Cement and Vista Land (cyclical companies that can play catch-up); Filinvest Land (unlocking value through REITs) and Aboitiz Power, Century Pacific Food and Puregold (mass retail).

Among the risks to COL’s outlook are potential disruptions to the vaccination rollout, rising inflation and tightening of monetary policy by the Bangko Sentral ng Pilipinas and major global central banks.

However, the risk of global interest rates spiking is seen very low given that employment rate and capacity utilization are still very low globally, rice prices remain stable, inflation expectations are benign and key central banks are likely to remain accommodative.