More bullish than bearish about 2025

The Philippine Stock Exchange Index (PSEi) ended 2024 higher by only 1.2 percent year-on-year.

But despite ending the year on a weak note, I believe there are more reasons to be bullish than bearish about the stock market in 2025.

One of the main reasons to be bullish is the continuous drop in inflation and interest rates.

Inflation will most likely stay low as the price of rice, which was largely responsible for keeping inflation elevated since the second half of 2023, already peaked last year. El Niño is already over.

Moreover, in July, the government reduced the tariff on imported rice from 35 percent to 15 percent. Finally, in September, India lifted its ban on rice exports.

Because of the said factors, rice inflation has fallen from a peak of 24.4 percent in March last year to only 0.8 percent in December.

Lower inflation should give the Bangko Sentral ng Pilipinas (BSP) room to loosen its monetary policy. In 2024, the BSP reduced benchmark rates by a total of 75 basis points (bps). If inflation stays low, BSP Governor Eli Remolona recently said that the central bank may cut rates by another 75 bps this year.

Lower inflation should also help boost consumer spending.

Note that consumer spending growth fell to an average of only 5.2 percent during the past two years from an average of 6.1 percent prior to the pandemic as high inflation hurt Filipinos’ ability to spend on nonessentials.

Another reason to be bullish is the midterm elections.

Since the 1990s, median GDP growth during midterm election years was 6.1 percent, much higher than the median growth of 5.1 percent during nonelection years.

The higher growth was due to the significant amount of campaign spending incurred by candidates running for office. Elected officials also increased their spending on highly visible infrastructure projects to boost their chances of being reelected.

The Philippines could also start seeing more foreign direct investments (FDIs) in the country starting this year.

It may be recalled that the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (Create More) bill was passed in November, with changes to the CREATE bill that will make it even more attractive for foreigners to invest in the country.

In fact, Special Assistant to the President for Investment and Economic Affairs, Secretary Frederick Go, said that he was anticipating over P4 trillion ($68 billion) worth of FDIs to materialize following the passage of the Create More bill.

This is significantly more than the $12-billion peak FDI that the Philippines registered in 2021.

The market’s negative reaction over a Donald Trump presidency also seems to be overblown. The Philippines is less vulnerable to higher tariffs and a potential trade war given that it is not an export-dependent country. Moreover, higher US debt and deficits might not materialize.

It may be recalled that Trump appointed Elon Musk and Vivek Ramaswamy to lead the newly created Department of Government Efficiency, which will look for ways to cut costs.

He also nominated Scott Bessent as Treasury secretary, who is advocating for the reduction of the budget deficit from around 6 percent to 3 percent of gross domestic product (GDP) by the end of the president’s term in 2028.

Admittedly, there are numerous risks to the Philippines’ positive outlook.

These include potentially disappointing fourth quarter GDP growth and corporate earnings; elevated US rates, a strong dollar and a weak peso; a potentially sharp correction in the US market given overly optimistic projections and expensive valuations; and the deportation of illegal Filipino immigrants and taxes on overseas Filipino workers’ remittances coming from the United States.

However, given how depressed share prices are, the risks seem to be largely priced in.

Note that the PSEi index is currently trading at only 10.5X P/E, way below its 10-year historical average P/E of 15.5X.

Many stocks also provide dividend yields that are greater than 3 percent, making them more attractive to investors who are very liquid and largely focused on fixed income products.

Average daily value turnover has also diminished to only P4 billion this January from a peak of around P10.5 billion in 2013 due to poor investor sentiment.

Finally, foreign investors have been consistent net sellers of Philippine stocks for more than five years already.

Given how unloved it is, there is a strong potential for Philippine stock to go up if good things materialize this 2025.

Consequently, although having some cash is still warranted given the numerous risks prevailing, I believe now is a good time to be less bearish and increase allocation to the stock market given its attractive outlook.