While stock prices near bear market territory amid various economic challenges, global investment bank Credit Suisse (CS) has urged investors to load up on Philippine equities to ride “stable” earnings growth and cheap valuations.
In upgrading its rating on Philippines stocks to “overweight” from “neutral”—contrary to the cautious view of other investment houses—Credit Suisse also shrugged off political and inflation concerns.
In a June 13 research note detailing the latest call of CS strategist Dan Fineman, the Swiss firm said postelection events “have confirmed our expectation that political risk would not likely be problematic,” adding that President-elect Ferdinand Marcos Jr. had appointed an “experienced technocrat” as Finance secretary.
CS was referring to Bangko Sentral ng Pilipinas Governor Benjamin Diokno who will soon have to deal with the country’s “twin deficits”—the simultaneous deterioration of the government’s budget deficit coming from the pandemic and the widening of the current account deficit, especially as the oil price shock bloats the country’s foreign exchange transactions with the rest of the world.
An “overweight” view is a call to buy stocks in excess of the allotment prescribed by the benchmark MSCI, as opposed to an “underweight” rating.
CS sees a “modest” upside for Philippine equities this year, driven by a projected 21-percent growth in earnings and cheap stock prices relative to potential earnings.
Its top market picks among large corporations are Ayala Corp., Bank of the Philippine Islands (BPI) and Jollibee Foods Corp., while among the smaller companies, it favors AllHome Corp. and Aboitiz Power.
“We are confident that the ongoing market weakness creates an opportunity to invest in quality stocks at cheaper levels, especially with the imminent reopening of the economy where mobility is expected to improve,” the research note said.
Its stock picks were described as “mainly defensive names that provide earnings resiliency amid rising costs, [and] limited political or regulatory risks” alongside improved individual company outlooks.
In the banking sector, BDO Unibank was also a top pick, aside from BPI. These are banks cited to have a strong franchise to generate low-cost deposits. Sustained loan growth and potential interest rate hikes, which will improve margins while deposit costs remain low, are expected to be the key sector drivers.
Overall, the sanguine view on the Philippines was also in line with CS’ mostly optimistic outlook for Southeast Asia. It also added to its overweight rating on Thailand.
Outside Southeast Asia, CS has kept its overweight recommendation on China but it issued an underweight call on South Korea to reduce sensitivity to global growth.
In the case of the Philippines, CS also noted that the country had one of the region’s biggest domestic economies as a percent of gross domestic product (GDP), also well as lowest export exposure.
Also cited was the country’s big business process outsourcing sector and resilient flow of overseas remittances.
CS, however, is still cautious about local consumer prices.
“Inflation is typically the Philippines’ Achilles heel. Although we might be a bit early in upgrading, we think that we are close to the point where inflation is less of a drag,” CS said. “Slower global growth should relieve some of the inflation pressures, and in any case, inflation in the Philippines does not appear worse than among emerging market Asian peers.”
Excluding volatile food and energy, CS said local inflation rate was even lower than regional core inflation averages.