PSEi: Stable for rest of 2014, bullish in 2015

With the first half of the year officially over, it is a good time to look at what the second half has in store for the Philippine stock market.

The Philippine Stock Exchange index (PSEi) opened 2014 at just below 6,000 points and climbed 16-18% in the first half, peaking at the 6,999.10 mark. The Philippine market posted the 3^rd highest percentage gain in Asia, next to India and Indonesia.

Looking at the balance of the year, April Tan, COL Financial’s VP and Head of Research, said “the market would most likely remain weak for the remaining part of 2014 due to concerns of rising inflation, political noise and the PSEi’s fair valuation.” For many investors, the valuation of PSEi is quite high at the moment, and this prevents them from buying and buoying the market.

In the past few months, the market has been in what analysts consider a “consolidation phase,” meaning that the level of the PSEi has been stable and just moving back and forth between the 6,600-7,000 range. This consolidation will most likely continue for the rest of 2014. Consolidation is beneficial to short-term traders who can buy at support prices (the lower limit of the consolidation range) and sell near resistance (the upper limit) with confidence.

COL Financial VP for Sales and Customer Support Services Juan Barredo expects a “possible short-term reaction to better support levels of 6,700–6,500.” The support level is where the buyers consider prices to be cheap and begin buying again. The market dipping to the near the 6,500 level will be a good opportunity for many investors to purchase their favorite stocks at cheaper prices. They can better maximize their profits this way.

The good news is that the market is projected to push past the consolidation phase in 2015 and possibly reach the 7,800 level by the end of the year. There are several reasons for this very bullish outlook. First is that monetary tightening globally is happening slower than expected. This indicates that foreign funds, instead of flowing back to more developed markets such as the US and Europe, may stay in Asian markets.

Second, Philippine economic growth remains robust. Strong consumer spending and greater investment in infrastructure is driving this growth. The number and value of awarded PPP (Public-Private Partnership) projects focused on improving transportation, communications, etc. is growing every year under the current administration.

Another reason is the Philippines is on the verge of entering the “demographic window.” This signifies that the country’s population is reaching the point where majority of Filipinos will be at the productive working age. Large numbers of working age citizens translate to high economic growth that can be sustained for decades.

With a strong market expected in 2015, the rest of the year will be a good time for stock market investors to position themselves by purchasing stock at discount prices during the dips. What are good industries or companies to get into to take advantage of this? Here they are:

Banks

With increased economic growth, demand for loans improve. Bigger banks like BDO Unibank (BDO) and Metrobank (MBT) have the advantage. Also competition from foreign banks due to the government measure allowing full foreign ownership will be insignificant in the short term.

Power

The power industry is also expected to reap the rewards of a growing economy as demand for power increases. The potential power shortage next year could also boost the profit margins of power generation companies like Aboitiz Power (AP).

Infrastructure

With the earlier mentioned increase in PPP projects, companies which are targeting to grow in that segment like Ayala Corporation (AC) will benefit. AC has been aggressively bidding for these projects, winning 77% of the value of contracts awarded by the government in the past 4 years. Higher infrastructure demand will shore up the profits of contractors like EEI Corporation (EEI), one of the largest in the country.

Property

With interest rates continuing to be low, more people are able to get loans and purchase properties. There are no signs of a bubble in the market, and concerns of oversupply are exaggerated. Companies with huge landbanks, strong rental income and balance sheets like SM Prime Holdings (SMPH), Megaworld Corporation (MEG), and Ayala Land (ALI) are solid buys.

Consumer

Just seeing the sheer number of malls and supermarkets doing business in the Philippines, it is no surprise that the consumer market continues to be strong. Although pricey at the moment, D&L Industries (DNL) is a good company to watch should its stock price dip. It focuses on specialized products for companies producing consumer goods, making its less vulnerable to competition.

Other industries

PLDT (TEL) also continues to remain a good buy, because of its stable earnings and high dividend payouts. It is as close as any stock comes to being a fixed-income instrument.

The last half of the year will be a good time to continue investing in the Philippine stock market. Market investors will have plenty of opportunities to buy at low prices. The expected growth of the market in 2015 will allow investors to grow their portfolios and deliver profits. As COL Financial Chairman Edward Lee likes to reiterate, “stocks over time outperform all other asset classes.” – Rappler.com