Philippine Stock Market Research

September 30, 2018

9M18 Recap 4Q18 Philippine Stock Market Outlook

The PSEi was again the worst performer among our monitored 18 developed and emerging stock markets in the world.  The PSEi incurred a 14.97% loss from the start of the year to the end of 9M18.  Russia (+17.3%), Argentina (+11.3%), the US (+9%), Japan (+6%), India (+4.2%), Brazil (+3.9%), France (+3.4%), Mexico (+0.3%) and Thailand (+0.2%) were the countries in the group which generated gains in 9M18.  The average loss of the 18-country group was 0.27%.  This was an improvement from the end of 1H18 of a loss of 4.59%.

PSEi 9M18

Despite its loss, the 2018 Opportunistic and Defensive Stocks Portfolio outperformed the PSEi and the ASI in 9M18.  The stocks portfolio originated from the Philippine Stocks’ 2018F Price to Earnings Growth and Cash Dividend Yields Part 2 Special Report on December 27, 2017.  They are composed of 15 stocks of equal weighting.

They are deemed to have opportunistic qualities as reflected by their growth upsides and defensive qualities as provided by their rich cash dividend yields.  The stocks portfolio was led by FB (+83%), SMC (+52%) and VLL (+2%).  A 1.85% cash dividend yield was also generated by the stocks portfolio as of 9M18.

2018 Stocks Portfolio vs PSEi 9M18

The PSEi’s PER eased to the lower 17x level in 3Q18.  This enticed a short-lived two-day rally in late September.  From 2012 to 2017, the PSEi previously bounced from 17x PER and staged rallies.  This is not the case now since inflation and interest rates are now rising.  The weak peso is the main driver of the spike up in inflation followed by higher fuel prices and effects of the TRAIN law.  Meanwhile, local interest rates are rising because of inflation and are also influenced by the upward adjustment of the US Federal Reserve of its federal funds rate as the US economy recovers.

Countering inflation and interest rates is EPS growth, and, as of this writing, the PSEi needs a 16% weighted average EPS growth among its stock components to halt the correction and establish a sturdy support level.  However, the PSEi only managed a 5.2% growth as of 1H18.  Upcoming 3Q18 earnings results likewise look dim as the third quarter is traditionally a weak quarter due to the rainy season.  Crude oil prices also rose in 3Q18 to the USD70 per barrel level signifying higher costs and expenses and margin squeezes for many listed companies.

Despite the market bearishness, the decline of the PSEi is actually seen as an opportunity to take position in value stocks for superior yields in the long term.  Raising liquidity and stock-picking this early is highly advised as the market gets used to the new conditions falling into place.  Our confidence in the Philippine economy is strong despite the current challenges.

The Philippines has notably generated GDP growth rate of at least 6% in the last 13 quarters or a little over than three years.  That is notably one third of the way towards becoming a Tiger Economy.  Fueling this is the Build-Build-Build push of the government, the positive impact of TRAIN and strong demand for infrastructure and services.  Amidst market melee, patience and preparedness are the keys to success.

Disclaimer

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