Stocks seen to breach 8,500 mark

The local stock index may surge to new highs, even breaching the 8,500 mark by end-2016 despite uncertainties arising from the next Philippine presidential elections and rising inflation and interest rates, leading online stock brokerage COL Financial said.

COL head of research April Lee-Tan, in a briefing to the Financial Executives Institute of the Philippines (Finex) last week, said that while there were abundant reasons to sell out of Philippine equities today—including high valuations alongside a string of economic and market threats—COL was confident that the market still had room to go up.

The market is now trading at a price to equity (P/E) ratio of about 19x, which means investors are paying 19 times the amount of money they expect to make. Local equities have historically traded only at a P/E ratio of 15x.

“Higher P/Es will likely be the norm going forward,” Lee-Tan said. “In our opinion, we don’t think we can wait for the 15x P/E. In as much as we’d like to see it, probably we won’t be going back there unless we have a bear market because interest rates will most likely stay low.”

Benchmark interest rate on 10-year local bonds have slid from 17.2 percent per annum in 2000-2001 to 3.9 percent at present. Although likely to rise towards the 5-percent level, Lee-Tan said this would still be supportive of a 19x P/E valuation.

Since 2008, the main-share Philippine Stock Exchange index has gone up by 326 percent. Apart from higher valuations, rising interest rates and uncertainties over the next administration, there are also jitters over the creation of an integrated Southeast Asian economy under the Asean Economic Community (AEC) by 2015. The port congestion in Manila and the impending power shortage have also stoked traders’ concerns.

But Lee-Tan said the issue of port congestion was already being addressed. At this point, she said, the power shortage would be the biggest risk to the market.

But it is not too late to resolve the situation, she said. Ongoing measures to improve infrastructure, will be beneficial in curbing bottlenecks in the economy.

“Despite the abundance of reasons to be bearish, we are confident that the stock market will continue to go up,” Lee-Tan said, adding that a 17-percent upswing from the current PSEi levels of about 7,200 may not seem too much, “it still beats a lot of investments today.”