By JAMES A. LOYOLA
While the local stock market may seem to have ended 2019 with a whimper, having failed to meet the lofty expectations of investors, the Philippine Stock Exchange index (PSEi) actually ended 4.68 percent higher than its close on the last trading day of 2018.
“I hope that everyone will draw inspiration and optimism from our accomplishments this year as we work together and do more for the development of the capital market in 2020,” said PSE Chairman Jose T. Pardo.
On the last trading day of the year, the (PSEi) closed at 7,815.26 points. The All Shares index was also higher year to date as it ended at 4,649.67 points, up by 2.9 percent.
Four sector indices finished in positive territory: The Property index was up the most with a gain of 14.5 percent, the Services index ended higher by 6.1 percent, while the Financials and Holding Firms indices rose 4.7 percent and 3.4 percent, respectively.
The Industrial and Mining and Oil indices saw losses this year and were down by 12.0 percent and 1.3 percent, respectively.
“The PSEi still had a decent finish despite the hefty decline in the share price of index stocks in the water distribution business. We hope that the issues concerning their sector will soon be resolved to lessen market jitters,” PSE President and CEO Ramon S. Monzon said.
The local bourse’s market capitalization registered a 3.0 percent increase to ₱13.95 trillion.
Daily average value turnover for the year came in at ₱7.29 billion, up from the ₱7.15 billion average in 2018. The market registered ₱14.50 billion worth of net foreign selling versus the ₱61.01-billion net foreign selling in 2018.
For the year, total capital raised amounted to ₱95.22 billion, around half of the ₱187.84 billion raised in 2018.
“The capital raising number this year was affected by issuers’ opting to tap the bond market or postponing their fund raising plans. Also, two banks accounted for 60 percent of the capital raised in 2018 and we did not have similar big deals this year. We hope next year’s capital raising pipeline will be more robust,” Monzon explained.
The stock market started the year on a positive note, gaining strength on the easing of the inflation rate after the government opened up the gates to rice imports and relatively stable oil prices.
Also boosting local sentiment were moves by the Bangko Sentral to reduce lending rates and increase liquity.
However, these were largely offset by negative factors such as the effects of the ongoing US-China trade war, the delay in the passing of the national budget which was a drag on the local economy, as well as the jitters caused by the government’s punitive actions against Metro Manila’s two water concessionaires.
Prospects for 2020
Looking ahead, Philstocks Financial Assistant Vice President for Research and Marketing Justino Calaycay Jr. said the new decade will have a hard time “replicating the storied gains of 2010-2019, a period in which aggregate prices surged 87.4 percent, despite posting annual losses in three of the last five years.”
He noted that, “the trade wars will be high on the totem pole of concerns, but domestically we start off with a bigger concern - regulatory risk. The Manila Water and Maynilad Water saga, plus the franchise renewal of ABS-CBN, have the potential to keep funds out of the utility sector, and those that fall under heavy government regulation.”
Abacus Securities Corporation Vice President for Research Nicky Franco pointed out that, “this is probably the hardest time we've had developing our market outlook for next year. The biggest reason for this, in our view, is heightened regulatory risk. One single issue – the validity of water concessionaires' contracts – caused the share prices of several firms to collapse and dragged down several others to a lesser extent.”
“This issue also has the potential to stir second round effects on the financial sector such as banks that have exposures to and/or investments on the affected entities. Alternatively, if and when settled, given the import of the services these entities deliver, they could be, for the non risk-averse investor, a gold mine,” Calaycay noted.
He added that, “Sans this issue, the market also battles with history – something it has in part defied over the last couple of years… Time and again the bears had been held back and repelled. Nevertheless, as 2019 showed, they have gathered some sort of momentum that may be hard to ignore particularly of the domestic issues persist.”
Franco said “GDP won't be a game changer. Sure it will be better compared to 2019's sub-6.0 perecent growth but it won't be anywhere near the 7 percent to 8 percent which was promised with the passage of TRAIN.”
Meanwhile, he said a high base set for 2019 plus underspending on capex and subdued business confidence point to unremarkable market earnings per share growth next year.
Inflation should remain benign in the first half of 2020, Franco expects it to rise continuously throughout next year due to higher global rice and oil prices, a weaker peso and base effects may lead to a breach of the BSP's target in the latter part of 2020.
Despite these, Franco believes the PSEi has the legs to run up to 9,000 in 2020 due to stock valuation – noting that “PSEi’s huge premium against its ASEAN peers in 2013 has been almost wiped out in the past two years (back near where it was at the start of 2010) as foreign funds retreated to the tune of $1.2 billion.”
“The PSEi, in fact, has seen its forward price to earnings ratio fall by close to a third from as high as 21.0 times in May 2013 to a recent low of 14.7 times,” he said.
Franco also believes foreign buying should start to trickle back in as “improved external (trade war easing) and internal (controlled inflation, better GDP) developments should stem the outflows next year.”
He also noted that brokers and investors now have lower expectations. “Probably stung by the difficult environment in the past two years, broker and investor expectations appear to be the least optimistic for some time. Such low expectations or lack of bullishness is a potent indicator. For us this means the bar has been set low and will be easier to surpass,” Franco said.
With this premise, he recommends investors to “stay clear of or underweight equities that are significantly or highly susceptible to regulatory risks” and “minimize potential downside by buying or switching to stocks that are trading near or below their 10-year ranges.”
Abacus Securities’s top sector for next year is the banking sectors since the BSP is likely to lower its benchmark rate and banks' required reserves.
Thus it recommends Metrobank which is seen to get an extra boost as it is the largest underwriter of car loans in the country.
The brokerage’s top picks for 2020 also include Ayala Corporation as the negatives (for Manila Water) have been priced in and the stock could get a sudden boost if some risks get resolved.”
It also likes gaming firm Bloomberry on expectations of a strong fourth quarter due to influx of Chinese gamblers and lower debt. It also recommends Cebu Air as it is the cheapest low cost carrier in the region.
D&L Industries is also in Abacus’ list as “the stock got some traction after management disclosed that it is in position to benefit from a proposed ban or tax on single use plastics. If we are right, the upside remains substantial…The company's solution for single use plastics has no local competitor and the applications are huge.”
Abacus also recommments MacroAsia Corporation as “the company will be among the biggest beneficiaries of growing air travel and tourism in the country.”
Also in the list is Puregold Price Club because “We expect further margin improvement through next year as S&R becomes a larger profit contributor and as a stronger peso keeps inventory costs down.”
The new year always brings fresh hopes and the PSEi has recently been performing well as the start of the year and the PSE, brokers and investors all wish this will be sustained all throughout 2020.
But, while analysts have their outlooks and forecasts, there is always room for surprises, both good and bad. May we have more of the former than the latter.