2015 Outlook, part 7

In this installation of the 2015 Outlook series, my friend James Lago of the PCCCI once again gives us his highly valuable views on many factors that will affect 2015 — Economic growth, stock market, US dollars, interest rates, liquidity and more. His outlook will be very helpful as to those who are taking a closer look at their portfolios.

 

The 2015 Outlook of James Lago

Economy – For 2015, our initial GDP growth forecast range is 6.0% – 6.6%. This baseline assumption is premised on the following growth rates of the major industry groups: industry growing by another 6.5%, services expanding by 6.0% and agriculture posting a 2.5% growth. On the expenditures side, we firmly believe that the substantial decline
in energy prices will translate to increased disposable income which in turn will translate to household spending (HFCE) projected to rise by 5.5% – 6.0%.

The major dividend from lower energy prices is lower inflation. Factoring in our anticipated peso-dollar exchange rate this year, our initial average inflation forecast for the year ranges from 2.1% – 2.5% using the 2006 base year.

PSEi – The bullish trend since its recovery in 2009 remains intact. A fresh historic high of 7,413.62 was achieved as the bull market completed its 6th consecutive year last year.

2015 starts with the leading and trailing relative valuations above its historical averages, as well as the regional average again. The lower energy price benefits will certainly be this year’s major driver. Investors are optimistic that the Philippine economy could post a 6.0% GDP growth rate, at least, for this year. Corporate
earnings will most certainly improve as a result of margin improvement and higher volume sales. Our base case scenario for the PSEi this year is a rise to 7,500 – 7,800. Healthy corrections in between is expected and we see the supports at 6,800 and 6,650.

Peso – US dollar – For this year, with the dollar index firmly above the key level of 90, and as funds flow back into USpeso-dollar dollar assets, we see the peso probably depreciating to 46.00 or even 47.00. It will result in a 61.8% to 66.0% retracement of its October 2008 – January 2013 appreciation. On the appreciation side, an appreciation to 44.50 or even 44.00 cannot be discounted within the year as the country will continue to attract both FDI and portfolio inflows given its continued growth prospects and its investment grade rating.

Domestic Fixed Income Yields – Real returns on the short-term yields remained negative anew in 2014 despite the sell-off in the latter part of the year. The year ended again with a normal yield curve whose steepness was reduced as the spread between the average short and long-term yields narrowed sharply to 160.30 bps, way below its 250 – 300 bps range.

Excess liquidity and portfolio flows into peso-denominated fixed income securities will most likely keep the continued rise of domestic yields gradual overall. The negative real returns on short-term yields in 2014 might not be absurd compared to the past few years. The flattening of the country’s yield curve, a historical first, is a possible scenario. The spread between the average short-term and long-term yields will most likely move within a 200 – 250 bps range within the year as investors will continue to find ways around the yield levels. The yield curve is also seen to remain essentially normal in 2015 with yields in between 2009 and 2012 yield levels.

Portfolio Strategy – Our overall core equity strategy for this year continues to be anchored on the soundness of a firm’s core business model and its stock’s key relative valuations, PER and PBV, trading at a discount to the PSEi’s averages. Cognizant of the benefits of lower energy prices on consumption spending and the fact that consumer-related or proxy stocks’ relative valuation are trading at a premium to the market’s averages, we chose only those whose premiums are reasonable enough to give investors a better upside potential. As a whole, lower energy prices will be beneficial to most firms by way of improved margins and increased volume sales. Several of the stocks in our short list also have attractive, above market average dividend yields.

Given the potential of a near flattening of the country’s yield curve, driven by the normalization of short-term yields and the low inflation scenario, corporates are seen to continue taking advantage of still affordable medium to long-term yields. We continue to encourage investors to take a serious look at the existing PSE-listed preferred
shares and possible new offerings in 2015 as the yields will remain attractive. For fixed income securities, investors will have to be opportunistic again, taking advantage to purchase, when yields touch attractive levels within the year. It is still best to diversify the fixed income portfolio across various tenors to optimize the portfolio yield. The suggested average tenor or duration of the portfolio must be within the short to middle-tenor ranges as yields on the long dated instruments are not attractive for now.

 

JFL_2011Joseph James Lago is the Head of the PCCI Securities Brokers Corp. He has over 2 decades of experience in the investments industry in various capacities. He is also a professor of the De La Salle University Graduate School teaching in Management and Economics. He is a much sought after researcher, economist and analysts. He is a Registered Financial Panner.

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2014 Outlook, part 7

It is my pleasure to presenting the views of Prof. James Lago of the PCCI. James is one of those experts that I often consult especially with the technicals of investing. His views have both macro and micro perspective and many have found his views helpful.James is also an esteemed colleague from the Registered Financial Planner Institute.

The 2014 Outlook of James Lago

On the PSEi

After being the region’s second best performer by May last year, the PSEi reversed course and ended 2013 with a gain of only 1.33%. The bullish trend since its recovery in 2009 remains intact. 2014 starts with the leading and trailing relative valuations at reasonable levels although these are still above its historical averages, as well as the regional average. We anticipate that equity prices will not be as volatile compared to last year. Investors remain optimistic that the Philippine economy could post a 6.0% GDP growth, at least, for this year, albeit slower than 2013’s clip. Corporate earnings are seen to be mixed given issues affecting some sectors. As a whole, our base case scenario for the PSEi this year is range bound trading within a 5,800 – 6,800 range. We view this as a fresh base building for a resumption of the major uptrend in the future.

On the peso-dollar

The peso exhibited its historical tendency to depreciate sharply as it surpassed the 43.00 – 44.00 resistance we expected, touching a 3-year low of 44.75 versus the U.S. dollar in late-August. The overall movement in 2013 was a 43.66% retracement of the November 2008 – January 2013 appreciation and has begun to recouple again with the US dollar’s gradual appreciation. Given the continued flow back into U.S. dollar assets, as well as developed markets, by foreign investors, the peso’s depreciation will most likely continue into 2014. The minor resistances of this depreciation are seen at 45.40 and 46.00. An
appreciation within the year to around 43.00 or even 42.70 is possible as another round of portfolio inflows cannot be discounted within the year.

On domestic yields

Given the calibrated monetary stimulus tapering that will be done by the U.S. Fed staring in January, we expect the yield curve to gradually shift upward. Excess liquidity and portfolio inflows into peso-denominated fixed income securities will most likely keep the rise gradual overall. We expect the negative real returns on short-term yields to continue into 2014. Yields on the longer-tenor instruments will certainly be higher as a result of the Fed’s action as U.S. treasury yields are the global benchmark. The spread between the average short-term and long-term yields will most likely move within a 280 – 330 bps range within the year as investors will continue to find ways around the yield levels. The yield curve is also seen to remain normal and will most likely surpass the end-2012 yield levels.

On the economy

For 2014, our initial GDP growth forecast range is 6.0% – 7.0%. Behind this is household spending (HFCE) projected to rise by 5.5% – 6.0%, the manufacturing sector continuing its above historical average expansion of around 7.0% – 8.0%, exports recovering by a modest 4.0% – 5.0%, the construction sector growing by above 10.0% as a result of
the reconstruction to be undertaken in the calamity damaged provinces, continued infrastructure spending private sector contribution. The services sector expansion is still seen to be an above-average 6.0%-7.0%.

 

james lagoJoseph James Lago is the Head of the PCCI Securities Brokers Corp. He has over 2 decades of experience in the investments industry in various capacities. He is also a professor of the De La Salle University Graduate School teaching in Management and Economics. He is a much sought after researcher, economist and analysts. He is a Registered Financial Panner.

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2013 Outlook, part 4

I am pleased to present the outlook of an esteemed colleague of mine, a professor and a well-respected analyst, Mr. Joseph James Lago, RFP. James is one of those who I consult with regards to the technical intricacies of investments and the economy and his wealth of experience made him one of the most competent finance professionals that I know.

Here’s the 2013 Outlook of Mr. Joseph James Lago

On PSEi

With the expectation of a 2013 GDP growth of at least 6.0%, the awaited investment grade credit rating, the averted US fiscal cliff and signs of a global economic stabilization and possible turnaround as the euro zone mends itself, our initial upside for the PSEi is
6,300 – 6,500. We are guarded with our forecasts as: a) it will be difficult for the Philippine equity market to be among the region’stop performer for the fifth consecutive year; 2) the trailing and leading relative valuations are above its historical and regionalaverages; c) a continued moderate growth of the US economy will attract portfolio flows as US stocks are still undervalued; and d) will the investment grade rating of the country translate to an
improvement in the more relevant FDI flows that generate real economic activity and real employment?

It must not be lost that markets have their ups and downs and the PSEi deserves a proper, healthy correction. This is to cap exuberance and bring relative valuations to reasonable levels for a firmer footing.

We see the immediate supports of a healthy correction for the benchmark index at 5,750 and 5,500.

On the concern of the local market’s price-earnings and price-to-book ratios that are above its historical and regional averages, it could be bearable if we are talking of a deep equities market where we have at least 200 actively traded, fundamentally sound firms to choose from as the market average is skewed by those with large market capitalization. Sadly, of the more than 300 PSE-listed issues, less than 100 meet our fundamentally sound, actively traded screen.

Peso – US dollar

The peso has decoupled from the US dollar last year as a result of sustained portfolio investment inflows, plain and simple. The continued appreciation of the peso is a continuation of a rise that began in November 2008. An appreciation to 39.75 or even 39.00 is almost a given. Should this occur, what we are seeing is a complete recovery of the peso from its May 1999 – July 2005 depreciation (where we saw it at 56.45). On the other hand, the peso is also prone to bouts of sharp depreciation when portfolio investments becomes outflows. A healthy weakening of the peso could see it dipping to 42.00 – 43.00 versus the dollar within the year.

Domestic Fixed Income Yields

2012 saw Philippine yields touching new record lows as portfolio inflows continued to pile on to peso-denominated debt instruments for better returns. This is a “new normal” phenomenon for emerging and regional markets. The unusually low interest rate environment will still continue in 2013. We see longer-tenor yields still testing new lows. The net effect is still a normal yield curve with a reduced steepness and a narrower spread between the average short and long-term yields compared to last year. This can also give the BSP room for another 25 – 50 basis points cut in its benchmark policy rates.

Portfolio Strategy

For equities, we advice investors to go for stocks that are still undervalued (trading below the market’s average PER and PBV) and temporarily under-performed the PSEi’s return last year. These cannot be overlooked forever as rotational buying and portfolio rebalancing are a fact of life as investors seek better returns. Stocks that fit these constraints or filters surprising have attractive dividend yields, some of which are even higher that what you can get from 10-year debt papers now. For fixed income, it is time to look at, and consider, some PSE-listed preferred shares as the yields are certainly better. There is almost no way investors can get real positive returns and beat inflation this year if the fixed income portfolio is skewed to the short and medium-term debt instruments and deposit products.

Joseph James Lago is the Head of the PCCI Securities Brokers Corp. He has over 2 decades of experience in the investments industry in various capacities. He is also a professor of the De La Salle University Graduate School teaching in Management and Economics. He is a much sought after researcher, economist and analysts.

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2012 Outlook, part 4

Up next in this 2012 Outlook series is from a colleague in the Registered Financial Planners Philippines and one that I always seek for advise with regard to investments and economics. He is known to be a sharp researcher & analysts as well as an esteemed teacher and my good friend, James Lago.

Here’s the 2012 Outlook of Mr. Joseph James Lago

On PSEi:
Should the Philippine economy post at least a 5.0% GDP growth in the first two quarters of this year, corporate earnings continue to improve, concerns of a domestic real estate sector glut is not a severe as currently anticipated, and the US economy continue on a moderate growth path even if the euro zone enters a recession as a whole, we believe the PSEi could finally hit the 4,800 level in the 2nd half of 2012.The arguments to a resumption of the bullish trend are weighted on the 1st half of the year as valuation and global
economic growth concerns linger. The immediate support of another potential sell-off is the 4,100 level. A triple bottom pattern at 3,705 cannot be discounted in the medium-term.

Peso – US dollar:
The dollar’s appreciation is likely to be sustained in 2012 if the US economy continues on a moderate growth path as anticipated. The other push factor is the euro’s loss of allure as an alternative reserve currency given the still unresolved debt crisis. If the 44.70 level is
surpassed, the peso could depreciate to around 45.50 – 47.00.

On Domestic fixed income yields:
Given that excess liquidity might still be a dominant factor even if this year’s average inflation will be close to 4.0% more or less, we expect negative real returns on the short-term yields to continue despite it gradually rising and seeking a new equilibrium level.
Yields on the longer-tenor instruments might dip further as investors continue to seek more attractive peso yields. As a result, the spread between the average short-term and long-term yields should finally normalize to around 250 – 300 bps for the year, with the yield curve still essentially normal.

Equities portfolio:
Smart foreign portfolio managers began changing their equities strategy in the middle of 4Q last year given the uncertain short to medium-term outlook, and the unusually low fixed income yields. Following the massive sell-off and flight to safety that ended in
September, equities portfolios were realigned to be geared primarily towards dividend capture. This is not an unusual strategy as smart domestic investors already implemented this strategy in the latter part of the 2000 – early 2003 period. Local telco stocks that carry high dividend yields that were unappreciated for about two years
became the darlings in December.

We are essentially underweight equities for the first half of 2012, in line with our overall outlook for the PSEi. Our recommended equityportfolio allocation strategy is that the portfolio be skewed towards issues with a high dividend yield, and at the same time firms that practice a dividend growth model. We believe that value stocks whose leading PER and PBV are at a discount to both the PSEi and regional averages will be good additions to round out the equities portfolio.

We acknowledge that price returns with some stocks will occur and maybe realized even in an uncertain market. But the issues will most certainly be random. Should the domestic economy indeed meet the minimum growth hurdle rate, and the US economy continue on a moderate growth path as aforementioned, the equities portfolio must then be
re-balanced in the 2nd half of the year to capture price returns.

Joseph James Lago is the Head of the PCCI Securities Brokers Corp. He has over 2 decades of experience in the investments industry in various capacities. He is also a professor of the De La Salle University Graduate School teaching in Management and Economics. He is a sought researcher, economist and analysts.

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