COL: Growth risks to stall stock market run at 8,600

Leading online stock broker COL Financial is “cautiously optimistic” on the local stock market this year, saying there is room for the main barometer to rise but gains may be capped at the 8,600 level as key risks remain on the horizon.

COL head of research April Lee-Tan said in a press briefing Monday that this year would likely be more favorable for local stocks, with inflation on a downtrend after last year’s upsurge, in turn boosting consumer confidence. Attractive local stock valuations alongside the strengthening of the peso, resurgence of foreign inflows and a possible pause in the US Federal Reserve’s monetary tightening are all expected to contribute to the recovery of stock prices.

However, Tan said the upside could only be halted by the Philippine government’s twin budget and current account deficits, which in turn would limit the peso’s power against the US dollar and the decline in local interest rates. She noted that, historically, there was strong correlation between peso strength and the stock market, with the latter typically weak whenever the peso was on a bearish path.

She also cited risks in connection with the slowdown of investments and government spending this year.

“We could see some disappointment in the government’s spending growth,” Tan said, noting the delay in the passage of the 2019 budget and procurement restrictions arising from the election ban ahead of the mid-term elections this May.

Another risk was that slower global growth—while beneficial to the Philippines in the form of softening global oil prices—could also curb the country’s exports and remittance flows, she said.

COL expects average corporate earnings to grow by 11 percent this year, improving from its estimated growth of 9 percent last year but slower than the 13-percent growth consensus this year.

COL’s outlook of 8,600 for the PSEi this year assumes that investors are willing to pay 17.6 to 17.8 times their projected earnings.

Juan Barredo, chief technical strategist at COL, said immediate upside to the PSEi may be capped as the index may soon pull back upon hitting the resistance levels of 8,200 to 8,300 in the first half of this year. But if the PSEi would gain enough steam and break these levels, he said the next technical target would be at 8,600 to 8,650.

“The first half may be beset by zigzag swings or wide patterns as some risks may cause opposing volatility,” Barredo said.

“But if the PSEi can remain over 7,300 (or better 7,580), then the rally posture may linger despite some pit stops and side reactions,” he added.

COL’s top picks from the banking, consumer, cement, airline, properties, gaming and conglomerate sectors are: Metrobank, Security Bank, D&L Industries, Max’s Group Inc., SSI Group, Cemex Holdings, Cebu Air, Megaworld, Ayala Land, Bloomberry and Ayala Corp.

The stocks seen to benefit from the rotation of funds once investors’ core holdings have peaked are Metro Pacific, First Philippine Holdings, AGI, China Bank and PNB.