2013 Outlook, part 4By Randell Tiongson on January 11th, 2013
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
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.
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.