PSEi may rebound to 7,000 next year

Investors may have to wait until next year to see a recovery in the main stock index to 7,000 as economic fallout from the coronavirus (COVID19) pandemic casts doubt on the sustainability of the market’s recent rebound.

This is according to April Lee-Tan, head of research at the country’s leading online stock brokerage, COL Financial, who said now would be the time for investors to focus on COVID19-resilient sectors like essential retailers, food manufacturers, telecoms and utilities.

There may likewise be an opportunity to pick up selected stocks from COVID19-vulnerable sectors like non-discretionary retailers, restaurants, property and banks for those who are willing to take a long-term view, she said.

In the past bull markets, it would have been impossible to buy those stocks at cheap valuations. “But limit your size. It’s not the time to be aggressive at this stage,” Lee-Tan said in a press briefing on Friday night.

Juan Barredo, COL chief technical officer, said: “We’re still in a bearish trend. You have to take your time in being able to accumulate. Try to be more focused in looking for short-term opportunities. Don’t chase prices upwards. Wait for stronger trend conditions.”

Barredo said the PSEi may soon see one more pullback phase which would bring in a better opportunity for investors to accumulate local equities.

“If we’re lucky, 5,700 will be the end of it. But I’m leaning towards 5,300 closer to 5,000 as objective of a corrective pullback, (followed by a) recovery thereafter,” he said.

If the index breaks below 6,000 to 5,750 anew, Barredo advised investors to stand back and wait for next support zones at 5,300 to 5,010.

“Be careful of illiquid stocks because low volumes will make it difficult for them to show extensive flows. Concentrate on second-line favorites or primary issues. Stay with those issues in resilient sector before moving to the other ones when they show better recovery,” he said.

COL’s top picks from the resilient sectors are leading canned manufacturer Century Pacific Food, Puregold and PLDT. For non-resilient sectors, COL recommended picking up Aboitiz Power, Ayala Land, Megaworld, BDO Unibank, Metrobank and D&L Industries.

In the short-term, Lee-Tan said prospects for the PSEi were dampened by a likely U-shaped instead of a V-shaped recovery alongside continued foreign net selling in the market.

A U-shaped trajectory occurs when the economy experiences a sharp decline and remains in a long period of stagnation followed by a relatively healthy rise back to its previous peak, as opposed to the more optimistic V-shaped recovery which shows a prompt rebound back to previous levels.

Lee-Tan noted that even with only two weeks of lockdown factored in the first quarter, the domestic economy had seen a contraction. Going forward, while most regions have reopened for business, she said the ability to relax remaining lockdown protocols would be constrained by the continued rise in local COVID-19 infection.

With daily new COVID19 cases hitting 2,000, she said the threat of returning to enhanced community quarantine (ECQ) was “very real.”

“Government will not be much of a help because they will very debt-conscious. They will just likely reallocate spending to what they think will be productive sectors,” she said.

Another issue cited by Lee-Tan is that the PSEi was heavily skewed towards traditional businesses which are more sensitive to COVID19, noting that the financial and real estate sectors, for example, already accounted for 44 percent of the index. The large conglomerates are likewise heavily exposed to the financial, real estate and consumer sectors, she said.

“Although we expect the market to weaken in the short term, we are not expecting a retest of the previous lows because first financial conditions today are better compared to previous crises. And at least for 2021, the profits will be better than 2020 and we feel that low interest rates make valuation more attractive,” Lee-Tan said.

In past crises, Lee-Tan said it would have been impossible to see the peso strengthening against the US dollar or interest rates declining , instead of spiking.