Opportunities despite the weak economy - April Lee-Tan

The past few weeks were busy for analysts like me given the slew of economic data and corporate earnings results that came out. Not surprisingly, the second quarter GDP numbers and corporate earnings results were generally disappointing. Second quarter GDP contracted by 16.5 percent, much sharper than the 9-percent drop that economists were expecting. Meanwhile, most listed companies reported significantly lower profits or losses that were much worse than expected. Consequently, analysts once again cut their earnings forecasts such that earnings for 2020 are now projected to be 30 percent lower than what they were in 2019. Although profits should recover next year, analysts are forecasting profits for 2021 to still be 10 percent lower than the 2019 level.

Nevertheless, there were some good news. Based on the government’s revised budget for 2020 and 2021, it is planning to spend more than previously planned to stimulate the economy. This is despite expectations that revenue collection will go down because of weaker economic conditions. For this year, the government plans to increase disbursements from P4.2 trillion to P4.3 trillion and for next year, from P4.2 trillion to P4.5 trillion. Higher spending by the government should help the economy recover faster. In fact, the second quarter GDP contraction would have been steeper if not for the 22.1-percent increase in government spending.

Although property companies suffered from significantly lower revenues in the second quarter as malls were forced to close and as construction activity was suspended, there were some bright spots. Demand for offices remained resilient during the second quarter as the business process outsourcing industry continued to expand. As a result, offices did not suffer from higher vacancies or lower rental rates, allowing property companies to book higher office leasing revenues despite the pandemic. Property companies also continued to sell residential properties during the quarter as buyers took advantage of more attractive payment terms to fulfill their dream of owning a home.

Moreover, when the government loosened restrictions in most parts of the country starting mid-May allowing most businesses to reopen, some companies’ businesses returned either close to or back to pre-ECQ level. Although their second quarter profits were badly hit since they were not allowed to operate in April and early May, they are quite optimistic about their outlook for the second half of the year.

For example, power generation companies said demand for electricity was now at 90 to 95 percent of pre-ECQ levels as most businesses had resumed operations. Toll road operators said traffic in July had reached 90 percent of pre-ECQ levels. Although demand weakened when Metro Manila and its neighboring provinces were once again placed under MECQ earlier this August, the decline was much less than the drop both power generation companies and toll road operators saw in April.

Due to changes in consumer behavior brought about by the pandemic, demand for some products and services have remained resilient and even picked up despite poor economic conditions. For example, many Filipinos are now remodeling their homes to make it more comfortable for them to work from home and for their children to do homeschooling. This is benefiting home improvement stores such as Wilcon and All Home which both said that sales had shown a “V” shaped recovery and were now back to pre-ECQ levels.

More Filipinos are also subscribing to home broadband to stay productive and entertained while they are at home. This is benefiting telcos such as PLDT and Globe which are both seeing substantial increases in their home broadband subscriptions.

Since more Filipinos now cook their own meals instead of eating out, demand for home appliances remain strong. In fact, appliance manufacturer Concepcion Industries said refrigerator sales in July had already exceeded sales in the same period last year.

While the country’s economic outlook remains poor in general, it is encouraging to know that there are some bright spots. For stock market investors, it means we should not be too bearish as there are opportunities to make money by buying undervalued stocks that are already recovering from the crisis. This is especially true in an environment where interest rates are expected to stay low, and where some stocks have both resilient earnings and high dividend yields. INQ

Source: Peso Economics