After hitting a low of 6,164.89 on May 24, the Philippine Stock Exchange index (PSEi) has gone up by 12.7 percent to close at 6,950.51 last Friday.
While fund flows were largely responsible for the market’s strong performance in the past few weeks, there are also fundamental reasons to be more bullish. These include the following:
Falling number of COVID-19 cases
While Visayas, Mindanao and parts of Luzon are experiencing high numbers of daily new COVID-19 cases, the number of cases in the National Capital Region (NCR), which was part of the epicenter of the second wave of infections in March, has fallen to an average of 700 on June 15 to June 21 from a peak of 5,535 on March 29 to April 4. Even with the high number of cases in other parts of the country, the seven-day average number of daily new cases in the Philippines has gone down to 5,546 from a peak of 10,845 on April 15.
Because of this, the government recently reopened NCR Plus—Metro Manila, Bulacan, Cavite, Laguna and Rizal. The reopening of NCR plus should help offset the tightening of mobility restrictions in other parts of the country as NCR accounts for 31.9 percent of gross domestic product (GDP), while Cavite, Laguna and Rizal are part of Calabarzon, which accounts for about 14.5 percent of GDP.
Vaccination rollout gaining momentum
Since the vaccination program began in March, 6.7 million people have received their first dose while 2.2 million are now fully vaccinated.
More people should be vaccinated soon as the supply of vaccines is increasing. As of last week, the Philippines still had a supply of 7.3 million doses. The pace of vaccination is now averaging about 223,000 doses a day. While this is still too slow, the government can reach its goal of fully vaccinating 70 million Filipinos by January next year if it succeeds in ramping up the pace of vaccination to 500,000 doses a day in the third quarter and 740,000 doses a day in the fourth quarter.
Even if the government fails to reach herd immunity for the whole country early next year, its strategy of prioritizing NCR plus 8 areas, which are the most populous and of highest density, should allow it to control the number of infections better and reopen the economy faster as these areas are at the greatest risk for COVID-19 transmission. The NCR Plus 8 areas are composed of NCR, Metro Cebu, Metro Davao, Bulacan, Batangas, Cavite, Laguna, Pampanga and Rizal.
Potential passage of Bayanihan 3
Last June 1, the House of Representatives passed the P401-billion Bayanihan to Arise as One or Bayanihan 3 bill. Under this, each Filipino will receive P2,000 in financial aid for a total of P216 billion, while others who are affected by the pandemic will receive more.
While it is still uncertain if the bill will be passed into law, additional subsidies will help boost consumer spending, which is being hurt by high levels of unemployment and inflation. Consumer spending was down 4.8 percent in the first quarter of the year.
Inflation already peaked
After rising to 4.7 percent in February, the inflation rate remained flat at 4.5 percent from March to May as food inflation dropped steadily from 6.7 percent in February to 4.6 percent in May. Food inflation fell as prices of rice, fruits and vegetables went down while meat prices were flat.
Coupled with the decline of US bond rates, the peaking of domestic inflation helped push the Philippine 10-year bond rate from a high of 4.5 percent in March to 3.9 percent currently. Lower interest rates should help boost the attractiveness of stocks as investors search for higher returns.
Corporate earnings recovery on track
Earnings of listed firms in the first quarter of 2021 rose by about 15 percent, with 67 percent of the companies that we monitor reporting higher earnings and only a handful reporting losses.
Admittedly, only a few companies reported higher revenues on a year-on-year basis as mobility restrictions only began in mid-March last year, making the first quarter last year a high base. Those that report higher revenues either belonged to resilient businesses or had international operations.
However, even with weaker revenues, companies’ earnings still improved due to various reasons including successful cost-cutting measures and lower tax rate brought about by the passage of the Corporate Recovery and Tax Incentives for Enterprises law.
Compared to expectations, more companies surprised positively, with the number of firms performing above expectations reaching 39.3 percent. This is more than the 32.1 percent that underperformed estimates for the first quarter.
Although the Philippine market could correct in the short term as the US Fed recently announced plans to start raising interest rates and potentially scaling back on its monthly bond purchases, the PSEi will most likely stay above its May low of 6,164.89 given the improving outlook of the local economy. Any correction brought about by the normalization of the Fed’s monetary policy should only be temporary given that the impact of a strengthening economy on corporate earnings will more than offset the increase in funding costs. INQ