The local stock market is seen to be vulnerable to profit-taking this week as investors weigh risks posed by the new coronavirus strain against optimism over a US stimulus package as well as the roll-out of vaccines overseas.
“Next week, the market could trade sideways with a downward bias. We may see some profit taking given that the market remains overvalued,” said Philstocks Financial Senior Analyst Japhet Tantiangco.
He noted that, “The new variant of COVID-19 is seen as the primary downside risk in this week’s trading. A worsening of its spread throughout the world or its entry into the Philippines may further tilt the local bourse’s bias to the negative.”
Online brokerage firm 2TradeAsia.com said the new strain has caused headwinds as international flights are again being heavily regulated, heavily impacting the aviation and tourism industries.
It added that, “lockdowns are again at the forefront, especially as Metro Manila remains to be in “MGCQ limbo.’”
“The saving grace is that vaccines in development also address the new strain; again, it all boils down to vaccine deployment, and Makati City offering free vaccination programs for voters provides a good and speedy model for other well-off urban centers,” 2TradeAsia.com said.
Tantiangco also noted that, “economic and corporate recovery hopes could temper the declines.”
He added that, “Investors are also expected to look towards the upcoming October 2020 Foreign Direct Investment and November 2020 OFW remittance data for clues on the local economy’s condition.”
“The index briefly breaking below 7,000 before strongly bouncing back towards the multi-week resistance of 7,300 on hefty turnover is a technical indication that momentum is skewed towards the belief that some semblance of 'renaissance' is still in the cards,” said 2TradeAsia.com.
Thus, the firm advises investors to “Trade the range.”
Abacus Securities Corporation is looking favorably at the banking sector which has been lagging behind as other stocks surged on growing optimism.
“Granted, the relatively cheap valuation for the banking sector is not without reason. Banks still have to tackle significant hurdles this year-- foremost among them being the possibility of lower than expected GDP growth resulting in further NPL provisioning, the prevailing low demand for loans, and the narrowing of net interest margins as the effect of lower interest expense fades and asset yields decline,” it noted.
However, Abacus said “we believe the sector is relatively low risk compared to the other sectors whose price performances may have already gone ahead of its earnings. The banking sector is also proving resilient, with most banks still showing profitability last year despite its challenges.”
It added that, “Investors with a long view towards what may be an extended recovery period may take advantage of dips to turn to our top banking picks: BDO Unibank and Metrobank on relatively low non-performing loans and high NPL cover; and Eastwest Bank on low valuation, earnings resiliency, and high (net income margins).”
Abacus also likes the tobacco and liquor sector because demand for their products is considered inelastic, which means that a degree of higher prices will not necessarily see an equivalent degree of lower volumes consumed.
Also, since many bars remain closed and hotels are in limited operations, liquor consumption will largely remain off-premise, which is positive for hard liquor.
“Our top pick for this segment is still LT Group, tobacco earnings contribute a little over three quarters of the conglomerate's total net income for 2020,” Abacus said adding that, “consensus 2021 earnings show LTG is super cheap at only 5.4 times PE, cheaper than many of its conglomerate peers and one of the cheapest in the consumer space.”
Abacus is also recommending Ginebra San Miguel as “earnings will nearly double for 2020 at around P3.2B, giving the company a PE of only 4.4 times, depressing this further to an expected 4.0 times for 2021 when earnings grow another 10 percent.”
Meanwhile, COL Financial has a BUY rating on Meralco mainly due to the relatively defensive nature of the firm’s distribution business compared to the overall market.
“MER’s valuation has also become increasingly attractive with the stock trading at 16.1 times 2021 PE, below its 10-year historical average of 17.5 times.