2014 Outlook, part 7By Randell Tiongson on January 15th, 2014
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%.
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. He is a Registered Financial Panner.