PSE index faring better, may not retest past lows — COL Financial

In Photo: COL Financial Chief Equity Strategist April Lynn C. Lee-Tan

The benchmark Philippine Stock Exchange index (PSEi) is not expected to retest previous lows given the “better” financial conditions under an ongoing health crisis over past events, according to COL Financial Group, Inc.

The local brokerage sets its target for the market index at 7,000, which is 15% higher compared with present levels, with an implied price-earnings (P/E) ratio of 15.3x.

“We’re not expecting a retest of the previous lows,” COL Financial Chief Equity Strategist April Lynn C. Lee-Tan said in the company’s virtual midyear market outlook briefing, Friday.

The market may not revert to levels previously recorded during times of crisis, the official said.

“In past crises, we’ve seen the market going down to 8x P/E. But this time around, there’s a possibility that we may not return to the 4,600 level where the 8x P/E is,” she claimed.

This is because financial conditions now are “better” with stocks becoming “more attractive” given the low interest rates and strong Philippine peso.

Such a condition implies a reduced insolvency risk and stock valuations becoming enticing over bonds, she noted.

For instance, companies now are raising funds as they are taking advantage of the cheap rates. “In past crises, this never happened. If you wanted to borrow money during crisis, it is always so much more expensive,” Ms. Tan claimed.

The trend of corporate bonds sale followed in part by the Bangko Sentral ng Pilipinas’ “aggressive” rate cuts.
However, Ms. Tan stressed that the stock market’s momentary strength is unsustainable as the country’s economic recovery is also expected to be slow.

In April and May, the local market rallied by 32.7% from a low level of 4,600 with a slight fall in the number of coronavirus disease infections globally and the observed optimism from the advances in treatment and vaccine discovery.

Aside from the perceived slow recovery, the local market will not maintain its present strength as it is heavily weighted towards traditional businesses, like financials and real estate, which are “sensitive” to the pandemic’s impact. “Because of that, our weak performance is not surprising,” Ms. Tan said.

Moreover, foreign investors, whose contributions to the market are crucial, are not buying into Philippine stocks due to government regulatory issues, such as the potential tax imposition on “junk” foods, the possible heavy regulations to issuing water contracts, and the denial of Lopez-led ABS-CBN Corp.’s franchise renewal by the Congress, among others.

“It doesn’t help that there are regulatory issues right now,” the official said.

Though next year’s earnings are subject to downside risks, COL Financial said: “there are opportunities to buy cheap stocks, and those are (from) companies (in) the vulnerable sectors.”

Among the company’s top stock picks are Puregold Price Club, Inc. Century Pacific Food, Inc., PLDT Inc., Aboitiz Power Corp., Ayala Land, Inc., Megaworld Corp., BDO Unibank, Inc., Metropolitan Bank & Trust Co., and D&L Industries, Inc.

Source: By Adam J. Ang|BusinessWorld

Source: Peso Economics