PSE Philippine Stock Picks by COL Financial (Feb 2018)

James Ryan Jonas

Here’s a summary of the Philippine stock market outlook and specific stock picks of online brokerage company COL Financial, as published in their “COLing the Shots” monthly research.

The report was published on February 20, 2018 and contains 9 stocks in their Top Picks list which you can find below. But first, here’s their analysis on the recent performance of the Philippine Stock Exchange (PSE) and outlook on the PSE index (PSEi) moving forward.

PSEi Target Level for 2018

“In January 2018, inflation surprised on the upside at 4% vs consensus forecast of 3.5%. Despite this, the BSP maintained its interest rate on the overnight reverse repurchase facility at 3.0%. During the same week, the government disclosed that the trade deficit widened to US$4 billion. Financial markets responded negatively, with the Philippine 10-year bond rate increasing sharply and the peso depreciating.

Due to our expectation that inflation and interest rates will most likely stay elevated, we raised our risk free rate assumption by 50 basis points to 5.5%. This led to a downward adjustment in our fair value estimates and our end-2018 target for the PSEi from 9,300 to 8,750 points.”

Concern on Inflation

“There are two reasons why we are worried about high inflation:

  1. Lower consumer spending – When prices of goods go up, consumer confidence usually deteriorates causing consumers to buy less. Given that consumer spending accounts for 70% of our economy, this puts GDP at risk of missing the 6.6% growth target for this year. This in turn could lead to disappointing corporate earnings results.
  2. Higher interest rates – When inflation picks up, rates usually go up to compensate investors for higher inflation. Higher interest rates are not good for equities as cost of capital increases leading to lower valuations.

Despite our concerns on inflation and interest rates, we would like to remind investors not to be afraid of this correction. In fact, we view this correction as a great opportunity to enter the market at more attractive levels.

We don’t think inflation will stay elevated on a permanent basis. Some of the factors pushing up inflation- such as higher excise taxes on fuel and certain consumer products – are non-recurring in nature. Moreover, the BSP has the necessary tools to control inflation. In due time, we are confident that they will use these tools.”

PSE index (PSEi) Outlook

“Assuming that history repeats itself, the PSEi could bottom anywhere from 7,900 to 8,100, and this could happen anytime from March to May of this year.

Although we recognize that there is a possibility that the PSEi could go below 7,900 before it bottoms, we believe that 7,900 to 8,100 is a good level to start accumulating stocks, fundamentally speaking.

At the said level, the PSEi would be trading at ~17.5X 2018E P/E, slightly below its 5-year historical average P/E of 18X. Over time, we are confident that the portfolio of investors who buy at the said level will be ahead in terms of performance.”

COL Stock Picks

After factoring in higher interest rates, we also reduced the Fair Value (FV) estimates of stocks in our “COLing the Shots” stock pick list. Nevertheless, we are maintaining our list of recommended stocks. Admittedly, some stocks could face challenges in the short term.

StockFair Value (FV) Target PriceBuy Below Price

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James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion ($56.4 Million) worth of retirement funds on behalf of thousands of UP employees.