Sun Life Investment sees rosier stock market prospects for 2023

The Philippine investment arm of Canadian financial services giant Sun Life expects the local stock market to shine in 2023 after a difficult year for local equites.

Lower inflation expectations on top of sustained household spending bodes well for banking and consumer stocks while property firms—especially those with heavy exposure to the office sector—would likely struggle, according to Mike Enriquez, president of Sun Life Investment Management and Trust Corp.

“Clearly, there is a case for investors to start going into the equity markets again,” Enriquez said in during a media briefing on their 2023 outlook.

“As interest rates are starting to stabilize and long-term rates might go down, it is more supportive of equity markets starting next year,” he added.

For 2023, Sun Life Investment sees the Philippine Stock Exchange index (PSEi) rising to 7,850, implying a 19 percent gain from the present level.

The PSEi is comprised of the country’s 30 largest and most actively traded companies.

Enriquez said 7,850 was their “base case” scenario, meaning there was potential for further upgrades. The forecast was based on corporate earnings growth of over 17 percent at a price to earnings multiple of 15 times.

“I think valuations are still underwhelming and we probably have better upside potential,” Enriquez noted.

He favored banking and consumer stocks as their top industry picks.

Enriquez said bank margins would likely grow on higher interest rates and loans. Consumer company margins would also improve given the expected easing of inflationary pressures in 2023 as aggressive monetary tightening by the Bangko Sentral ng Pilipinas curbs price surges.

“[W]e’ve seen commodity prices start to go down so input costs would be much lower for the consumer sector. Because this year, they were hit hard by higher input costs,” he explained.

One segment to avoid was the property sector, especially developers that were less diversified in their revenue sources.

Enriquez said residential sales might slow due to the higher interest rate environment. Moreover, those with large office rental exposure might also struggle especially if the prevailing hybrid and work-from-home setup continues.

“Those [developers] with malls will probably will have offsetting effects given mall going has resumed,” he said.

For 2023, Enriquez expected an average inflation rate of 4.5 percent, which was still above the BSP’s target range of 2-4 percent.

This might prompt the BSP to continue raising interest rates in the near-term before slowing the pace next year, he said.

Sun Life Investment is also forecasting 2022 economic growth at 7.6 percent before slowing to 5.35 percent in 2023 as the recovery from the pandemic slump normalizes.

Meanwhile, the Philippine peso would end the year at about P56 against the US dollar before “stabilizing” at P57-58 in 2023.

“This is what investors are looking for…as long as there is stability compared to what we’ve seen this year when the peso weakened significantly,” Enriquez said.