Growth amidst volatility

BusinessWorld hosts Stock Market Roundtable 2018

By Bjorn Biel M. Beltran, Special Features Writer

The Philippine economy is undergoing great changes. The Duterte administration has begun to roll out a tax reform that promises to put more money back into consumers’ pockets and raising taxes on goods like gasoline and coal, all while funding its ambitious multi-trillion “Build, Build, Build” infrastructure plan. This has flooded the market with a bullish sentiment that caused the bellwether Philippine Stock Exchange Index (PSEi) to close 2017 at a record 8,558.42 points, earning 25.1% for the year. The rally pushed onward to break the 9,000-point barrier in the first month of 2018.

The stellar climb proved to be too high and too fast to be sustainable, however, and profit-taking, along with external factors such as the rising rates of the United States Treasury yields, sent the market plunging back down to the 8,500-level. Amidst this backdrop of market volatility did the country’s investing community gather to hear the insights of four respected stock market professionals at the Makati Shangri-La Manila for the 2nd annual BusinessWorld Stock Market Roundtable held last Feb. 20.

The esteemed panel consisted of Augusto M. Cosio, Jr., president at First Metro Asset Management, Inc.; April Lynn L. Tan, vice-president and head of research at COL Financial Group, Inc.; Justino B. Calaycay, Jr., head of research and engagement at Philstocks Financial, Inc.; and Michael Gerard D. Enriquez, chief investments officer at Sun Life of Canada (Philippines), Inc. They discussed and explored the underlying causes of the recent equities bull run and eventual crash, the effects of the tax reform, as well as all the significant events and developments that led the country to where it is today.

At the roundtable, which was moderated by Regina Lay of Bloomberg TV Philippines, each panelist spoke in succession about various topics, and a few members of the audience got to ask their questions and receive answers.

The main question on everyone’s minds had been if the market could weather such volatility, can it return to a sentiment of optimism, or further fall into bearish territory due to the mounting pressures of inflation, a depreciating peso, and higher interest rates?

To this, the panel unanimously agreed that Philippine equities are unlikely to see any new lows as the country’s long-term economic growth prospects remain intact. But there are a few key factors that need to be monitored to ensure the growth and stability of the market, such as inflation.

“One of the key risks we were really worried about was inflation,” Ms. Tan said. “First of all, tax reform is highly inflationary because of higher oil prices, excise taxes on sugary drinks, and the secondary effects of higher oil, etc. Then you have a weaker peso. A weaker peso is of course inflationary because we import a lot of things and they are going to become expensive.”

As the Philippine economy becomes more competitive in the global market, it could also see higher commodity prices due to higher demand for goods like steel and oil.

“That’s just the price you pay for development. Everything just becomes expensive. A strong economy is inflationary,” Ms. Tan said.

Inflation hit a three-year high of 4% in January, hitting the upper band of the government expectations. The potential effect of higher prices is that it could lead to a decrease in consumer spending and higher interest rates.

The panel unanimously agreed that Philippine equities are unlikely to see any new lows as the country’s long-term economic growth prospects remain intact. But there are a few key factors that need to be monitored to ensure the growth and stability of the market, such as inflation.

“We expect the Bangko Sentral [ng Pilipinas] (BSP) to raise interest rates probably one or two times this year, in line with the U.S. Federal Reserve as well as the weakness of the peso,” Mr. Calaycay said.

Nevertheless, such factors will only serve to hinder the Philippines’ unswerving development, as long-term prospects remain positive due to strong macroeconomic fundamentals.

“This too will pass. It is not a runaway inflation,” Ms. Tan said. “The BSP has the tools to control inflation. It is not a long-term problem. It is a short-term issue.”

Addressing the recent market correction, Mr. Enriquez said, “I think that was a quick reality check on what may happen in the market if it’s not backed by fundamentals. The market can move up, but it should always be backed by fundamentals. There should always be a reason why the market should move higher.”

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The correction marked a change in the market sentiment that dampened expectations for the Philippines’ growth. Ms. Tan said COL Financial downgraded its 2018 forecast for the PSEi to 8,750 from 9,300 after factoring in the impact of higher borrowing costs.

Mr. Calaycay, meanwhile, also hinted that a revision of its base-case forecast of 7,900-8,200 and best-case projection of 10,700-11,000 is in the cards after the release of the first-quarter corporate earnings.

Ms. Tan expects the PSEi to bottom out at the 7,881 and 8,062 levels around March and May.

All in all, the market correction should be seen as an opportunity to buy equities for cheap, according to the panel, as the probability for long-term loss in such a market remains minimal, and opportunities are plentiful for informed investors.

“I feel constructive about the market. I feel that there are opportunities in there,” Mr. Cosio said, noting that the banking sector stands to gain much from the recently implemented tax reform package.

He said that as low-income workers become exempt from income taxes as a result of the tax reform, this would directly increase the average balance of CASA (current account, savings account) in banks.

“As a whole, CASA in the banking sector will definitely grow without the banks doing anything,” Mr. Cosio said. “Secondly, higher short-term rates will increase net interest margins for banks.”

Mr. Enriquez even went as far as to say that the Philippines deserves to trade at a premium over other Asian markets on the back of the strong domestic economy and impressive infrastructure development.

“As a long-term investor, we are excited about how infrastructure will play a role in the GDP. Right now, it’s 70% consumption, but if the government starts to spend and investments come into play, we can see our (gross domestic product) growth breaching seven percent,” Mr. Enriquez said.

“Those waiting for a bear market, I’m sorry, I think you will be disappointed,” Ms. Tan said.

The BusinessWorld Stock Market Roundtable 2018 was presented by BusinessWorld Publishing Corporation; supported by Globe Telecom, Sun Life Financial, and Shell Philippines; with event partner Fiera De Manila; and media partners The Philippine Star and Bloomberg TV Philippines.