Why I’m becoming more bullish on the stock market

I admit, I was not very bullish on the stock market during the start of the year.

Although the Philippines entered the COVID-19 crisis in a position of strength, our economy is recovering at a much slower pace compared to our Asian neighbors. Factors responsible for this include the government’s more conservative fiscal stimulus policies, tighter mobility restrictions, and the country’s greater dependence on domestic spending rather than exports.

The only reasons why I thought the stock market would still go up were the availability of vaccines, record low interest rates making stocks much more attractive compared to cash or bonds, and potential inflow from foreign investors wanting to increase their exposure to emerging market stocks. Recently though, there are signs that economic conditions are improving, making me more optimistic about our county’s economic fundamentals and the stock market.

The most important change is the government’s more proactive stance in procuring vaccines. From only 25 percent initially, the government is now targeting to vaccinate 60 to 70 percent of the population by the end of 2021 which is enough to reach herd immunity. Since January, the government has entered into agreements with various pharmaceutical companies to purchase vaccines, and with a budget of P82.5 billion, it has enough funds to execute its plans.

As more Filipinos get vaccinated, the number of daily new cases should go down, giving the government a more compelling reason to loosen restrictions. This should also give people greater confidence to go out and spend, boosting economic activity.

Another reason why I am more optimistic is the surprise improvement in manufacturing activity. After several months of contraction, the IHS Markit Philippine manufacturing purchasing managers index or PMI jumped to 52.5 in January, finally breaking above the 50 value that separates expansion from contraction. According to the latest report, domestic demand conditions improved prompting manufacturers to increase production. Purchasing activity and stocked inventories also went up as manufacturers said they expected demand to pick up.

Moreover, just last week, the two chambers of Congress ratified the bicameral conference committee report on the Corporate Recovery and Tax Incentives for Enterprises (Create) bill. Once signed into law, it will reduce the corporate income tax rate from 30 percent to 25 percent for large corporations and to 20 percent for small and medium sized businesses. Note that the lower tax rate could boost profits of listed companies by as much as 7 percent, hastening the return of profitability to prepandemic levels. The bill is also expected to help the country attract more investments as revised tax incentives are finalized, reducing uncertainty on possible changes in the future. More investments mean more jobs and faster economic growth.

Finally, after rising to as high as 7,400, the PSEi index is now trading at more reasonable levels. Two weeks ago, it fell to as low at 6,600 which, in my opinion, is an attractive level to buy stocks. At 6,600, the PSEi would be trading at 18X its projected earnings for this year, which is already at par with its 10-year historical average. Admittedly, the Philippines continues to face challenges such as convincing Filipinos to get vaccinated and rising inflation. However, I am confident that we will eventually overcome these challenges. Note that in other countries, people are increasingly becoming more confident in getting vaccinated after people who got vaccinated remained healthy. Moreover, inflation is only expected to increase temporarily because it is largely caused by supply side shocks such as the African Swine Flu and weather disturbances. In fact, even with the higher-than-expected January inflation, the BSP is maintaining its full year inflation target and as such will most likely keep interest rates low.

The country’s improving economic fundamentals should give the stock market a more compelling reason to go up. Because of this, the ongoing correction is a good opportunity to accumulate stocks at attractive valuations before actual economic numbers prove that growth is picking up steam. INQ