Main stock index seen rebounding to 8,600
Global insurance giant Sun Life of Canada sees the Philippine stock barometer rebounding to 8,600 this year, thanks to a more favorable macroeconomic environment and a prospective double-digit growth in corporate earnings.
This 15-percent projected upside for the Philippine Stock Exchange index (PSEi) versus last year’s finish is anchored on expectations for a “healthy” and “realistic” average corporate earnings growth of 11.7 percent, Sun Life Financial Philippines chief investments officer Michael Enriquez said in a briefing on Wednesday.
Sun Life expects Philippine gross domestic product (GDP) to grow at a faster pace of 6.4 percent this year compared to 6.2 percent in 2018. Next year, GDP growth is seen to hit 7 percent.
Inflation—last year’s sore point for the country—is seen easing to 3.5 percent this year from last year’s 5.21 percent, thereby returning to the Bangko Sentral ng Pilipinas’ (BSP) target range of 2-4 percent. This is seen to further soften to an average of 2.8 percent next year.
Given a benign inflation rate environment, Enriquez said the BSP might cut its policy rates three times more this year by a quarter percentage point each, thereby bringing the overnight borrowing rate to 3.75 percent by yearend. “The surprise (sovereign) credit upgrade (from Standard & Poor’s) to BBB+ (two notches above entry-level investment grade) strengthens the case to lower rates,” he said.
With the inflation rate back to targeted levels, the BSP has so far reduced its overnight borrowing rate by a quarter-percentage point. It also announced a 200-basis point gradual reduction in banks’ reserve requirement ratio through July this year.
As such, Enriquez pointed out that the interest rate environment both locally and globally was favorable for local equities. Investors may thus be willing to buy local equities at 18 times projected earnings, he said.
“If earnings overshoot 12 percent, price to earnings (ratio) will even be lower. That means the market will become cheaper and I think the Philippine market deserves to trade at a premium given the fact that there’s more earnings visibility here given that 75 percent of our GDP is consumption-driven. We can see that a lot of the companies on the consumption side will be able to contribute to the consumption growth,” he said.
With an actual earnings growth of 11-12 percent in the first quarter, Enriquez said earnings expectations for the full year were more upbeat.
“We expect banks to recover strongly this year and some of the conglomerates and the retailers as well because last year, retailers were hit hard by the higher cost of goods and lower purchasing power due to higher inflation,” he said.
Sun Life’s PSEi forecast of 8,600 is slightly higher than the market consensus forecast of about 8,400.
But while Sun Life is “quite bullish” on the PSE, Enriquez said investors should expect some volatility. One momentary overhang is coming from the MSCI rebalancing that will add weight to China.