2016 Outlook, part 2By Randell Tiongson on January 19th, 2016
This installment will showcase the views of James Lago of PCCI Securities Brokers Inc.
James is one of the most insightful and in-depth analyst I know and this is because he sees things from a big picture approach being an economist and an analyst at the same time.
Economy – For 2016, our initial GDP growth forecast range is 5.8% –
6.0%. This baseline assumption is premised on the following growth
rates of the major industry groups: industry growing by about 5.3%,
services expanding by 6.0% and agriculture posting a 1.0% growth. On
the expenditures side, we see household spending (HFCE) rising by 5.9%
– 6.4% as the continued decline in energy prices will still translate
to additional disposable income. The major election year historical
contribution to GDP is likewise considered.
Should the lower energy prices environment continue, we forecast 2016
inflation to remain manageable. Factoring in our anticipated
peso-dollar exchange rate this year, our initial yearend CPI range
forecast is 146.0 – 147.0 resulting in an average inflation forecast
ranging from 2.0% – 2.3% using the 2006 base year.
PSEi – The bullish trend since its recovery in 2009 remains intact. A
new historic high of 8,136.97 was recorded as the bull market entered
its 7th consecutive year last year, surpassing our most optimistic
estimates but was certainly short-lived.
2015 starts with an unfolding minor correction phase and the leading
relative valuations still above its historical averages, and at a
premium to the regional average anew. Since only a 23.8% correction
of the 2009 – 2015 uptrend was achieved, the corrective phase may
still continue in to 1H 2016 before a real rebound unfolds. Most
corporate earnings will continue to improve even at a base case of a
slower growth rate compared to 2015. Our base case scenario for the
PSEi this year is minor supports of the ongoing healthy correction at
6,200 and 6,000 before a recovery to 7,000 – 7,300. Undoubtedly, the outcome of the Presidential elections will sway investor confidence.
Peso – The peso depreciated as expected last year as international
investors continued to move back to dollar assets.Net portfolio
outflows primarily from equities, weak net FDI flows and lower export
receipts sent the peso to a 47.49 low, way past our 46.00 – 47.00 base
For this year, we see the ICE dollar index rising to at least 101.50,
as funds continue to flow back into US dollar assets given the FOMC’s
gradual interest rate normalization. The pace should not be as severe
as that in 2015. With this, our base case scenario therefore for the
peso is a depreciation to around 48.00 that will result in a 76.4%
retracement of its October 2008 – January 2013 appreciation. A further
depreciation to 49.00 is possible if the former is surpassed. While it
is currently at equilibrium at around 47.00, an appreciation back to
46.00 or even 45.00 is possible.
The PBOC’s managed weakening of the renminbi (or yuan) will not
significantly impact on the peso. We were not surprised by this
development after their initial action in August last year as the PBOC
is guiding China’s currency to a level that it believes will be
appropriate given several variables. Our base case scenario for the
renminbi is an eventual return to the RMB/CNY6.80
Domestic Fixed Income Yields – Real returns on the short-term yields
turned positive by mid-year last year as inflation slowed and
investors took profits price-wise to demand higher yields ahead of the
U.S. Fed’s interest rate normalization. The yield curve underwent a
nonparallel upward shift and remained a normal yield curve at yearend.
The spread between the average short and long-term yields spread was
below our 200 – 250 bps range expectation throughout last year as the
medium and longer tenor yields did not move up significantly.
For 2016, the yield curve is also seen to remain essentially normal
with yields ranging in between early-2012 to 2013 levels. The spread
between the average short-term and long-term yields might move within
a 150 – 200 bps range and investors will continue to be opportunistic
to find ways around the yield levels. We expect corporate debt raising
and preferred shares offerings to continue this year as rates remain
affordable vis-à-vis historical levels coupled with the gradual rate
hike path in the U.S.
Portfolio Strategy – Our overall core equity strategy remains 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. It is also worth looking into some key index heavyweights as
the valuation premium have narrowed to reasonable levels versus the
Taking account as well of a generally bearish market scenario and a
consumption driven GDP growth that will get an added lift from
election-related spending, high dividend yield, non-cyclicals and
baseline consumer stocks are on top of our recommendations. Should a
firming up of global equities markets occur by midyear, there should
be no hesitation to switching from a dividend yield play to capital
appreciation to improve total return.
Our recommendation for fixed income investors is still to spread out
investments over the offerings this year and several tenors for
diversification. Short-term yields are now at attractive levels
vis-à-vis inflation expectations. Positive real returns may be
harvested again.The suggested average tenor or duration of the
portfolio is it is skewed to the relative middle of the middle-tenor
ranges given that yields across the yield curve range at the start of
2016 are attractive.
Joseph James Lago is AVP 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.