Philippine stocks could rally by around 45% by the end of the year, according to stock brokerage company First Metro Securities (FMS). The brokerage firm, in a stock research report released last week, wrote that the Philippine Stock Exchange index (PSEi) could reach 8,150 to 8,300 points by the end of 2020 — a 45% upside from the current 5,600 level of the stock index.
First Metro Securities, a brokerage subsidiary of the Metrobank Group, believes that “the worst in markets is likely behind us” and given post-risk adjustments in response to the COVID-19 pandemic, there appears to be a “significant upside” to the PSEi’s projected year-end level.
Here are highlights from their equity research report.
Not out of the woods yet but…
“The Philippine equities market has priced in a sharp economic downturn in both global and domestic markets. We are not out of the woods yet as COVID-19 cases have yet to peak globally.
Nonetheless, we take comfort that the worst in markets is now likely behind us. The unprecedented monetary and fiscal support from governments suggest that we have moved from Crisis to Response stage in the Crisis, Response, Improvement, and Complacency (CRIC) cycle. The rescue packages, while they will not prevent a sharp economic downturn nor flatten the curve in COVID-19 cases, they are a necessary part of the bottoming process and recovery. Furthermore, the decisive actions by the Philippine government should limit the damage and foster an early recovery.
PSE currently at its most attractive level
Despite the recent improvement in share prices (PSEi has gained 21.36% from its recent closing price low of 4,623.42 points), the equity risk premium (ERP) on the Philippine equities market continues to be at its most attractive level in history at 867 bps (+4.9 standard deviation) – 70 basis points (bps) higher than the peak of 797 bps during the 2008-2009 Global Financial Crisis (GFC).
Even after applying a subjective 25% decline in forward earnings, the risk-reward for Philippine equities still looks attractive at 652 bps. Therefore, we believe that current levels are good entry points to add equity risk for a 6-to-12-months horizon.
It will not be a straight line up; markets will remain unsettled in the near-term until COVID-19 is successfully contained. Nevertheless, we recommend taking advantage of such dips in the market because we cannot ascertain if the next one will lead to fresh lows or not.
Large hot money outflows but could soon decelerate
Last month, we saw outflows of US$239.3 million from Philippine equities, wiping out the prior four (4) months of net inflows of US$233.9 million. We highlight that the acceleration of outflows was largely a result of increasing uncertainty from COVID-19 and the length of time that containment measures would be in place.
Moving forward, we expect the pace of outflows to decelerate substantially this month.
First, foreign investors have been light on Philippine equities for some time now. We believe that the large outflow in March had unwound net inflows in the last four (4) months. Second, we highlight that foreign funds have been net sellers with outflows of US$496.7 million on a cumulative rolling 12 months basis. Lastly, the low interest rates is a catalyst for fund flows into emerging market equities and bonds.
With the light positioning of foreign investors, there is ample headroom to increase exposure in the Philippine equity market once COVID-19 is resolved or is at a manageable level.
Given the analysis above, we lower our year-end target for the PSEi from the initial estimate of 8,950-9,150 to 8,150-8,300 level.
This reflects the following risks that we have assumed: (i) 2020 & 2021 Forecasted Earnings per Share (EPS) of P381.50 & P479.90 — implying a 21.6% / 11.4% discount to current consensus estimates; and (ii) Equity Risk Premium (ERP) to level off at 471 basis points (bps), which is +0.5% Standard Deviation of its 5-year rolling average vs. the previous ERP target of 344 bps.
We prefer to accumulate cyclical index glamor names as they should lead the recovery. In order of preference, our top stock picks are:
- Universal Robina (URC)
- Robinsons Retail Holdings Inc. (RRHI)
- SM Investments Corp. (SM)
- Robinsons Land (RLC)
- SM Prime (SMPH)
- Ayala Land (ALI)
- Puregold Price Club (PGOLD)
- BDO Unibank (BDO)
There are, of course, risks to this call, including:
(i) the high degree of uncertainty surrounding the duration and severity of COVID-19;
(ii) if the economic recovery does not materialize or is slower than expected;
(iii) costly missteps stemming from the speed that rescue packages were approved;
(iv) unfavorable changes in consumption patterns in a post-COVID-19 world; and
(vi) strong US dollar.”
For additional analyses and trading recommendations on the Philippine stock market, check out these useful references from our partner PinoyInvestor:
- PSE Daily Market Outlook
- Weekly Stock Picks and Model Stock Portfolios
- Fundamental Analysis with Stock Price Targets
- Technical Analysis with Stock Price Support and Resistance
Disclaimer: The report above is merely provided for information and should be construed solely as statements of opinion and not statements of fact. The information presented should not be seen as and does not constitute an offer or solicitation to buy any securities. Before making a decision to trade or to invest, the user should perform due diligence and practice sound decision-making. Invest only in products and instruments that you understand.
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