by DA Market Securities
The bull market is set to celebrate its 6th year anniversary this March 2015, from continued optimism on the back of continued global growth amid divergent regional outlooks. Notably, equities continue to provide higher yield compared to other equity classes.
As the US Federal Reserve exited its quantitative easing (QE) program, the announcement of an interest rate hike that may come later in June 2015 saw markets rally to record highs. However, there still are concerns over a steeper and higher terminal rate, from the current 0.25% to a range of 2.75%-4% by 2019.
The Global Gross Domestic Product (GDP) growth is expected to increase from 2.6% in 2014 to 3.1% in 2015 driven by the US as its GDP is expected to grow from 2.8% to 3.4%.
Divergent Regional Growth
While growth in the European Union (EU) and Japan remain lackluster (EU from 1.3% to 1.7% and Japan from 0.8% to 1.2%), both the European Central Bank and the Bank of Japan maintained expansionary measures to spur growth.
Meanwhile, slowing growth in China remains a concern with China’s GDP expected to decline from 7% to 6.8%.
New oil standard has seen a 50% plunge in oil prices due to an oversupply from non-OPEC (Organization of Petroleum Exporting Countries) producers that have led to great concern over oil producers’ profitability, but positively impacts on consumer disposable income, thus, spurring retail sales growth.
Sustaining High Growth Rates in the Philippines
For 2014, the government’s GDP growth target of 6.5%-7.5% remains challenged, needing an 8.2% growth in the 4th quarter just to meet the low-end of the range. Meanwhile, maintaining the same 3rd quarter growth of 5.3% would translate to a 5.7% average growth for the year (down from 7.2% in 2013).
For 2015, the government intends to continue its programs and make up for this year’s low spending rate which was due to reforms being implemented. The government has maintained its GDP growth targets of 7-8% (in 2015) and 7.5-8.5% (in 2016). Based on more conservative estimates of growth, the Philippines is still set to be a global outperformer, above its regional growth targets.
Low Inflation and Interest Rates to Support Growth
The inflation rate averaged 4.3% as of end-November, within the inflation target range of 3-5% for 2014. In its last policy meeting last December 11, the BSP reduced its inflation forecast from 4.4% to 4.2% (in 2014), from 3.7% to 3% (in 2015) and from 2.8% to 2.6% (in 2016).
Interest rates are still near historical lows with the BSP hiking overnight borrowing and lending rates by only 50 basis points (bps) to 4% and 6%, respectively, form record lows. Amid easing inflation, there is less upside pressure to interest rates, despite an upward bias.
Current consensus expectation is another 50 basis points for 2015, still manageable amid ample liquidity to continue spurring economic growth. The BSP also increased reserve requirement of universal and commercial banks by 2% to 20% and SDA rate by 50 bps to 2.50%.
As of press time, the Philippine Peso (Php) is set to be the only Asian currency apart from the HK$ to strengthen in the 4th quarter due to the seasonal peak of remittance inflow which accounts for 10% of GDP. Although there are concerns of weakening next year due to dollar strength, the PhP is expected to be more stable vs. emerging market peers.
PSEi Target Level in 2016
Currently, we are on the 5th wave (5) of that 3rd wave (iii) within the larger 3rd wave (III). Based on this pattern, we project a PSEi target of 8,200 for the 5th wave (5) as it equals the 1st wave (1) rise of 2,500 points. This target may coincide with sentiment cycle of uncertainty that comes with the changing of the guards or the Presidential elections in May 2016.
After which, we must then be vigilant of a 4th wave (iv) that can ensue. As a point of reference, we experienced a smaller 4th wave (4) of the larger 3rd wave (iii) last year, which ended with a triple bottom by December 2013. Although, we cannot predict the exact bottom of the 4th wave, we also note the rule that the 4th wave (iv) can never overlap with the 2nd wave (ii = 3,921).
Another guide to conjecturing the 4th wave (iv) level is considering the rule “If Wave 2 is a sharp correction, Wave 4 will be a flat correction. If Wave 2 is flat, Wave 4 will be sharp.”
Considering this, the 2nd wave (ii) of the larger 3rd wave (III) can be considered a sharp correction, having declined 1,700 points or 23% in a mere 7 months. This can imply that the forthcoming 4th wave (iv) could be flat (i.e. shallow). But just like in forecasting the 2nd wave (ii) of 2014, investors would be well advised to watch the pattern play out and signal signs of reversal to err on the safe side. Patience is a profitable virtue.
Guide on Stocks to Invest In, by Sector
As a guide, investors may choose to invest in stocks per sector with the following characteristics:
1. Property, Consumer/Retail – choose stocks that continue to expand locally and regionally/globally in terms of existing market share and segment reach;
2. Logistics and Energy – invest in companies that are growing their portfolio capacity;
3. Banks – choose those benefitting from strong loan growth and trading gains on the back of a strong economy, but also eyeing candidates for a Mergers & Acquisitions play;
4. Gaming – good overall, as the local industry moves towards an inflection point;
5. Construction or related companies – choose those which especially benefit from PPP projects.
6. Commodity – this sector has increasing demand on the back of improved global growth, but volatility risk remains a major factor to consider amid concerns of oversupply, leading to lower prices vis-a-vis profitability (i.e., Nickel, Copper and Oil). Meanwhile, Gold prices continue downtrend amid lower global demand.
7. Conglomerates – prefer conglomerates with a diversified play on above-mentioned positive sectors.