With tax reform in place, PSEi seen hitting new highs

After a three-year consolidation capped at the 8,000 level, fund management group Philequity sees room for the Philippine Stock Exchange index to break into new highs, if Congress will pass a tax reform package acceptable to fiscal officials.

Even without the tax reform program, Philequity’s research team is looking at the PSEi hitting 8,770 next year from 8,125 this year, Philequity vice president for business development Miguel Agarao said in a briefing to investors on Saturday.

“We’ve been stuck in a consolidation range for three years now but earnings [will grow] by double-digits next year,” Agarao said.

Philequity expects average PSEi corporate earnings growth next year to improve to 12.6 percent from 8.5 percent this year.

If the PSEi were to be targeted based on a price-to-earnings (P/E) ratio of 19x—the middle of the range seen in recent history —the PSEi will be at 7,838 this year and 8,824 next year.

A P/E ratio of 19x means that investors are willing to pay 19 times the kind of money they expect to make from the basket of stocks under the PSEi.

“But not all stocks are valued based on P/E. So if we base the [PSEi] target on the research team’s target prices, for 2017, target is 8,125 and 2018 is 8,770. This is without tax reform, by the way,” Agarao said.

For the last three years, Agarao said the PSEi had been encountering stiff resistance at 8,000.

“The index needs to break not just 8,000 but 8,137 also, the all-time high. We need to hurdle both before you call it a decisive break,” he said.

The market touched this level 23 times this year and yet the breakout hasn’t been decisive, he said.

Last year, the PSEi touched the 8,000 level 20 times.

In 2015, when the index first hit the 8,000 mark, this level was revisited eight times, Agarao noted.

This time, Agarao said there were two reasons why the PSEi had climbed back to the 8,000 level.

First, he noted that global macroeconomic conditions had improved, citing synchronized global growth, low interest rates, low oil prices and rising corporate earnings which in turn have improved fund flows to emerging markets.

Another reason is that domestically, political noise has abated, Agarao said.

He said concerns over the Philippines’ current account and fiscal deficit—which in turn had been causing peso weakness—had been offset by expectations that the country will pass the tax reform program and fund the golden age of infrastructure.

“So what happens if we pass the tax reform in full? We break out of consolidation. What happens after we break out of consolidation? We go to new all-time highs,” he said.