Market enters ‘corrective’ consolidation

THE LOCAL stock market has entered a period of “corrective” consolidation this second semester but the main stock barometer is seen exploring uncharted territory and posting new highs at around 8,400 level by next year, according to leading online stockbrokerage COL Financial.

In a recent briefing, COL chief technical analyst Juan Barredo said that as the PSEi had recently broken below its seven-month trendline, a “corrective” consolidation was activated. He said short-term rallies might be limited to 7,950-8,055 with some possibilities of revisiting the PSEi’s all-time high of 8,136 before yearend.

COL Financial head of research April Lynn Tan said the recent bombing in President Duterte’s bailiwick Davao City, which prompted the declaration of a “state of lawless violence,” would only dampen sentiment in the short-term. “Over the long term, there’s no significant impact assuming this is put under control,” she said.

Although the online stockbrokerage was much cautious on the stock markets six months ago, Tan said the risk factors highlighted at the start of
the year failed to materialize while the country’s economic growth surprised positively.

At the beginning of the year, she said that most people were expecting the US Federal Reserve to raise interest rates—a development that could curb fund flows to emerging markets—four times this year. But as it was turning out, she said the Fed was likely to raise interest rates only once—if at all—this year.

“We expect the Philippine economy and the stock market to do well in the next six years under the new Duterte administration,” she said.

The analyst noted that the Duterte administration had inherited a very strong balance sheet from the Aquino administration as well as a rich pipeline of infrastructure projects under the public-private partnership (PPP) framework that would only need to be executed. These consisted of 14 PPP projects in the bidding stage and five for approval of the National Economic and Development Authority.

“The government also announced a very action-oriented 10-point socioeconomic agenda, showing plans on how it will capitalize on the numerous growth opportunities in the country,” Tan said.

COL’s favorite in Mr. Duterte’s 10-point agenda, she said, was the plan to raise infrastructure spending to at least 5 percent of gross domestic product (GDP).

Tan also noted that in 2015, the country just entered the demographic window, a period of rapid economic growth driven by the entry of majority of the population into working age. Such period of rapid economic growth as a result of demographic dividends is expected to last for 40 years or until 2055.

The Philippines is also seen less vulnerable to external developments, being largely a domestically driven economy. Tan said added that the country had significant room to grow investments coming from very low levels compared to its peers in Southeast Asia.

Nonetheless, Tan said the market was vulnerable to a correction in the short term. “Given the Duterte administration’s plan to cut taxes and increase spending on infrastructure, there is a possibility that the country’s budget deficit would balloon and this could lead to a downgrade in the country’s credit-rating,” Tan said.

At the same time, she said valuations were no longer attractive as investors were now paying 20 times the amount of money they expect to make this year.

“Moreover, potential upside to our end-2017 target of 8,400 is limited. This makes the market vulnerable to selloffs assuming that companies come out with disappointing earnings results. It also increases the likelihood of share placements as companies take advantage of their high levels of valuation,” Tan said, adding that government spending might also grow at a slower pace in the short-term as the new administration would still be in an adjustment phase as what usually happens when there is new leadership.

COL’s key stock picks are in line with infrastructure, tourism and consumer themes. On infrastructure, it favors Metro Pacific Investments Corp. as well as top lenders BDO Unibank and Metropolitan Bank and Trust Co. For tourism, which is seen to benefit from five airport PPP projects in the pipeline, COL’s top picks are Cebu Air, Ayala Land Inc. and Robinsons Land Corp. On the consumer theme, it favors SM Investments, D&L Industries, Century Pacific Food and Concepcion Industrial Corp. Doris Dumlao-Abadilla