J.P. Morgan Global Research has downgraded the Philippines to “underweight” and ranked it last in the order of preference in ASEAN in its equity investment strategy immediately after the conclusion of national and local elections.
In its ASEAN Equity Strategy released on May 9, 2022, J.P. Morgan also downgraded the Philippine real estate sector to neutral.
“We recommend selling into a possible post-election hope rally in-line with the Philippines Equity Strategy team’s view,” said JPM, the global leader in financial services.
It added that, “Philippines equities face myriad challenges, including twin deficits, higher inflation, slower government spending in the quarters after the election (transition pain), high public debt, risk of a valuation derating and potential earnings growth disappointment.”
JPM cited an increasing risk of a valuation derating that could be exacerbated by portfolio outflows, the domestic monetary tightening cycle and retail investors shifting to safe havens like bonds or bank deposits.
But it expects “re-opening benefits for the GDP growth trajectory to wane next year and put strong pressure on the government to deliver on capital outlay spending acceleration.”
It said higher commodity prices will weigh on the Philippines’ current account flows and fiscal spending because the country is a net energy importer with oil and raw materials accounting for more than 50 percent of imports and is equivalent to more than 15 percent of gross domestic product.
“If commodity prices continue to stay elevated, it will have important implications for the Philippines, an economy grappling with twin deficits,” J.P. Morgan said.
Meanwhile, inflation due to rising oil prices and reduced real income would drag private consumption, which accounts for more than 75 percent of the Philippines’ GDP.
JPM said it “sees a 20 percent oil price increase might translate to +0.8 percent impact to CPI and -0.4 percent to GDP… This is likely to challenge the BSP’s capability to control inflation and could force to raise the policy rate more quickly than anticipated.”
At the corporate front, JPM expects to see earnings growth disappointment. It noted that its 2022 outlook for the Philippines was based on a strong consumption rebound that underpins a 25 percent year-on-year earnings per share recovery.
“Headwinds from inflation, a depreciating peso and weaker sentiment will impact the pace of the recovery and GDP growth disappointment, adding downside risk to EPS estimates,” JPM said.
Near term, it sees risks of downward earnings revisions across sectors (banks, real estate especially developers, consumer staples, and power generation companies) emerging from the rapid rise in oil, energy, and agricultural commodity prices.