Main stock index forecast to hit 5,000 mark in 2012

The main Philippine stock index is on its way to set a new peak at 5,000 through next year on the back of record-high corporate earnings and improvement in economic fundamentals, a stock expert at First Metro Investment Corp. said.

FMIC vice president and investment advisory group head Eduardo Banaag Jr., in a recent briefing for selected clients, said the PSEi would likely rise to 4,830 in the second half of 2011 and extend its winning streak through next year.

Banaag said the run-up to 5,000 would be partly driven by expectations that earnings of index stocks would continue to hit record highs.

This developed as the “drivers” behind price-to-earnings ratio were seen continuing to improve.

He said earnings of index stocks, excluding those of Philippine Long Distance Telephone Co. and Aboitiz Power Corp. (which together account for about a fifth of the corporate earnings of PSEi stocks) could rise by 20 percent in 2012.

“The market will not ignore the trajectory of earnings,” he said.

This year, corporate earnings will set another record year although the growth rate is seen at a more modest 5 percent compared with last year’s 44 percent growth. Banaag said he expected the price-to-earnings (PE) ratio improving to 15.9x times in the next six months, thus driving the PSEi surge to 4,830.

A company trading on a PE ratio of 15.9x times means that investors are paying 15.9 times the amount of money the company is making in a given year. In 2010, the local market’s PE ratio was 13.7x.

“New funds will invest before the consensus,” he said. “A rally will ensue sooner.”

At the same time, Banaag said the PE ratio should be driven higher by a further re-rating of sovereign credit by Standard & Poor’s, which currently rates Philippine government credit at two notches below the much-coveted investment grade. “S&P will consent to Fitch,” Banaag said, suggesting a potential upgrade to a level that would only be a notch short of investment grade.

In June, Fitch Ratings upgraded the Philippines’ long-term foreign currency issuer default rating (IDR) to “BB+” from “BB.” “The upgrade reflected progress on fiscal consolidation against a track record of macro stability, broadly favorable economic prospects and strengthening external finances,” said Andrew Colquhoun, head of Fitch’s Asia-Pacific Sovereigns team.

Given this favorable outlook, Banaag said conglomerates, electric utilities and independent power producers would dominate earnings. Specific stocks that were likely to emerge “winners” were Semirara Mining Corp., DMCI Holdings, JG Summit, Vista Land and Lifescapes, Energy Development Corp., First Gen Corp., Metro Pacific Investments and Robinsons Land Corp., Banaag said. These stocks have PE ratios that lag the market average and thus provide “growth at a reasonable price,” Banaag said.

The PSEi last week broke into new record highs, setting a peak at 4,439.61 on July 5.