January 1, 2019
2018 Recap 2019 Philippine Stock Market Outlook
The PSEi placed 13th among our monitored 18 developed and emerging stock markets in the world. The PSEi incurred a 12.1% loss from the start to the end of 2018. Russia (+18.5%), Brazil (+15%), India (+4.7%) and Argentina (+0.8%) were the only countries in the group that generated gains in 2018. The average loss of the 18-country group was 6.03%.
The major concern in 2018 is the decelerating average economic growth of the 18-country group. GDP growth slowed down from an average of 3.64% in 1Q18 to 3.09% in 2Q18 and then to 2.71% in 3Q18. This deteriorated market indices PEG ratios despite the decline in their average PE ratios to 14.61x by the end of 2018.
The 2018 Opportunistic and Defensive Stocks Portfolio incurred a 9.7% loss in 2018. It outperformed the PSEi’s loss but underperformed the ASI’s 8.6% loss in 2018. 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 (+54%) and SMC (+32%) and generated a 2.50% cash dividend yield in 2018.
The outlook for 2019 is bearish; however, it is not seen as severe as what happened in 2018. The spike up of crude oil prices, weak peso and TRAIN law all contributed to higher inflation in 2018. These were on top of the normalization and increase of interest rates during the year, and these factors all brought down the PSEi and other equities markets.
2019 commences with lower crude oil prices, an already weak peso at PHP52.53:USD1 and TRAIN law 2 which is not yet ready for immediate implementation. Interest rates, however, will continue to increase stemming in the US with at least two US Federal Reserve funds rate hikes in 2019 from four in 2018. This brings us to the major concern for the Philippine stock market in 2019.
The BSP’s efforts to rein in inflation has brought up shorter term interest rates, and this may cause an economic slowdown in 2019. GDP growth has been at least 6% in the last 14 straight quarters from 2Q15 to 3Q18, and this trend may be derailed this year. As of this time, the PSEi also needs a demanding weighted average EPS growth of 15.5% to break free from the current bear market.
What is going for investors in the Philippine stock market in 2019 is that it is already at low levels as compared to the start of 2018 when the PSEi was at euphoric highs. The PSEI is within our recommended buying window ranges. Selective buying, patience and concentration of funds at deep bargains will pay off well when the PSEi breaks from its slump in the next two years.
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