Duterte goals seen boosting PH growth to 6.5-7%

THE PHILIPPINES can easily achieve an average 6.5 to 7 percent growth rate in the next six years if the Duterte administration could deliver on its promise to accelerate infrastructure spending and further liberalize the economy, stock brokerage house AB Capital Securities said.

The trend gross domestic product (GDP) growth rate under the administration of former President Aquino (2010 to 2015) improved to 6.2 percent, led by the rebound in the industrial and services sectors. This beat the numbers of all post-Edsa Revolution presidents: 4.8 percent under Gloria Macapagal-Arroyo, 2.3 percent under Joseph Estrada, 3.1 percent under Fidel V. Ramos and 3.4 percent under Corazon Aquino.

“We can achieve new highs next year if the government could deliver,” said Jose Vistan, vice president at AB Capital. “The Aquino administration did very well and the market is a testament to that. It will be a hard act to follow.”

Backed by good macroeconomic fundamentals, the Philippine stock exchange index (PSEi) is seen reaching new highs next year if the new administration could make early gains in its economic agenda. The market peaked in April last year at around 8,100, a level that the index was trying to revisit on the back of strong foreign inflows.

AB Capital analyst Victor Felix said that after breaching the 7,800 levels, the PSEi could retest 8,100 this year. “We’re on an upward channel.  We’re generally bullish medium-term,” he said.

But AB Capital also said the market may pull back to around 7,564 by yearend in line with a likely 2016 price-to-earnings (P/E) ratio of 19.3x.  At current levels of around 23x P/E, the market was seen too pricey and likely to revert to the 19x five-year historical ratio, unless corporate earnings catch up.

A P/E ratio of 19x means investors are paying 19 times the amount of money they expect to make in a given period.

This year, AB Capital expects corporate earnings to grow by 11 to 12 percent and favors investing in banks, consumer and property sectors.

Among the external headwinds the country should look out for, albeit minor disruptions, are the Organization of Petroleum Exporting Countries (Opec) meeting next month and the US elections in November.

The United Kingdom’s decision to leave the European Union was also seen having a limited impact on the country. The US Federal Reserve was also expected to push back plans of another interest rate hike in the aftermath of the Brexit vote.

Felix said investors would be looking to the administration’s 10-point socioeconomic agenda as guide for direction. He said the “bright spots” in the agenda were as follows:

Reduction of corporate income tax by 5 percent to 25 percent and the individual tax rate from 32 percent down to 25 percent. To compensate for the decline, the government would introduce official property valuation methods, impose additional tax on junk food and index the petroleum excise tax to inflation.

To attract foreign direct investments, the government is keen to amend Constitutional restrictions on foreign ownership, with a clear exemption on land ownership.

Maintain current pipeline of public-private partnership (PPP) projects and accelerate infrastructure spending to 5 percent of GDP.

Raise the fiscal deficit from 2 percent to 3 percent of GDP to make way for tax cuts and increased spending on economic and social services.

For consumer stocks, AB Capital favored companies that delivered strong first quarter 2016 results and were not related to the junk food/alcohol/tobacco industry. Its top picks in the sector were Cebu Air, Puregold Price Club, Robinsons Retail Holdings and Metro Retail Stores Group Inc.

Among banks, AB Capital favored banks with strong growth prospects and high upside potential such as BDO Unibank, Metrobank, Security Bank and East West Bank.

In the property sector, AB Capital favored property stocks that have exposure in the consumer and business process outsourcing sectors like SM Prime, Robinsons Land Corp. and Megaworld Corp. It sees rental income as the main earnings driver in the short- and medium-terms as residential sales slow down.