By Arra B. Francia, Reporter
FIRST METRO Investment Corp. (FMIC) expects the local bourse to stage a rebound in the second half of 2018, albeit revising downward its year-end target for the Philippine Stock Exchange index (PSEi) due to higher oil prices, the global trade war, likely rate hikes by the US Federal Reserve, higher domestic inflation and the weakening peso, coupled with some political concerns.
From its year-end target of 9,400 announced last January, FMIC now expects the PSEi to settle within a range of 7,900 to 8,200 at the end of 2018. This will translate to a price-to-earnings (PE) ratio of 18-19x. The PE ratio indicates how expensive a market is. FMIC also expects an earnings per share growth of 11.5% to support the index’s rally.
The downward revision came after the index hit a low of 6,986 last June, which officially placed the PSEi in bear territory — or a 20% drop from its high of 9,058 in January.
“For the rest of the year, as the economy remains strong, fiscal policy continues to support growth, corporate earnings deliver and preparations for the 2019 elections take-off, the PSEi may end on a stronger note,” FMIC Senior Executive Vice President Jose Pacifico E. Marcelo said during the FMIC Midyear Economic and Capital Markets briefing in Taguig City yesterday.
FMIC Vice President Cristina S. Ulang noted that the benchmark index’s slump was due in part to the economy’s continued expansion, which brought with it higher inflation, rising interest rates, and the weaker peso-dollar rate.
“We would like to view it as a reality check. The market is trying to make sense of what’s happening… we may be having a 6.8% GDP (gross domestic product) growth, but the growth is bringing with it a lot of challenges, a lot of pain,” Ms. Ulang said.
NEW NORMAL
The PSEi’s exit from bear territory indicates that it is now adjusting to a “new normal,” as investors become more comfortable with the higher interest rate environment, faster inflation and the weakening peso-dollar exchange rate.
Data released by the Philippine Statistics Authority earlier this month showed headline inflation accelerated to a fresh five-year high of 5.2% in June.
The inflation print last month picked up from the 4.6% figure logged in May and exceeded estimates from the BSP and the Department of Finance.
BSP Governor Nestor A. Espenilla, Jr. said the central bank will review its forecast inflation path as this will shape the strength and timing of its next monetary policy response to temper inflation expectations.
The BSP has already raised its rates twice this year, with borrowing costs now within a 3-4% range.
FMIC also blamed the outflow of foreign funds from the stock market, which has so far reached P69 billion for 2018. The company noted that foreign investors are “unfairly lumping” the Philippines with weaker emerging markets, when the country is actually “the strong part of that space.”
For instance, FMIC noted that the country’s external debt to GDP is the lowest among its peers in the ASEAN region at 23.3% of GDP. Meanwhile, Malaysia’s external debt to GDP is at 67.4%, Thailand’s is at 32.3%, while Indonesia’s is at 37.4%.
The Philippines also has the highest reserve requirement ratio at 18%, compared to Indonesia’s 65%, Malaysia’s 3.5%, and Vietnam’s 3%.
“In terms of boosting liquidity, the BSP has room to cut the reserve requirements. The timing will be key as any further cuts should not undermine the inflation-controlling efforts of the BSP. So we expect to see around 1-2% more cuts before the year ends,” FMIC President Rabboni Francis B. Arjonillo said.
Given the higher interest rates, fund raising initiatives at the country’s capital markets also slowed down by 11% to P327 billion in the first half of 2018. FMIC expects capital raising to recover in the next semester, driven by the fixed income market.
Total capital raised for the year is projected to grow by 7% to P773 billion, P220 billion of which will come from the equities market while P553 billion will be fixed income issues.

RELATED ARTICLESMORE FROM AUTHOR