The local stock market is in for a bumpy ride this year as it will kick off with concerns over a surge in COVID-19 cases possibly due to the highly-transmissible Omicron variant plus the volatility due to the coming elections.

“In the latter part of 2021, fears have fueled on the Omicron variant which is still a key risk this year,” said Regina Capital Development Corporation Managing Director Luis Limlingan.

He noted that, “As we enter 2022, we anticipate the May presidential election, more initial public offerings, and steady recovery backed by an effective COVID-19 pandemic response.”

The Philippine Stock Exchange said it will open 2022 with the back-to-back IPO of Haus Talk, Inc. (P750 million) and Figaro Coffee Group, Inc. (P767.4 million).

With changes under the new normal, 2TradeAsia.com said that, “More entrants from future-proof sectors are expected over the next year—renewable energy, healthcare, and tech.”

Regarding the upcoming elections for President, Abacus Securities Corporation noted that, “Although there is a clear front runner at this point according to the latest Pulse Asia poll, this may actually be a deterrent for foreign investors.”

It explained that, “They may see the front runner in the same mold as the incumbent during whose term the PSE saw record hot money outflows.”

For its part, 2TradeAsia.com said “The upcoming year will be nothing short of volatile for local equities, and for numerous reasons.”

“National Elections by mid-year will drive macro movements for the first half, with headlines from COVID variants likely pulling focus every now and then (note recent spikes in cases in neighboring ASEAN countries--a possible prognosis for the first quarter),” it added.

Philstocks Financial Senior Supervisor for Research Japhet Tantiangco said “The market’s performance this year will hinge on whether the COVID-19 situation is controlled and, hopefully, the current surge is just a holiday uptick and not another uptrend in COVID cases sparked by the Omicron variant.”

“If the COVID situation is brought under control and the economy further opens up, it will push spending and gross domestic product higher. Confidence will improve and lead to more consumption and investment and this will result in higher economic growth,” he noted.

However, Tantiangco said the downside risk for the market is also due to COVID-19 because the Omicron variant is already in the country and this can lead to a surge in infection which will dampen market sentiment.

“It is also possible that there will be other variants that will be worse than Delta or Omicron,” he warned.

Abacus believes “we are likely to get another large COVID wave eventually. Although it appears less severe, Omicron has led to record cases in some countries even though they have high vaccination rates. A report also stated that even 3 doses of Sinovac, which accounts for most of the shots given in the Philippines, offer relatively low protection against the latest variant.”

Meanwhile, 2TradeAsia.com said “The Fed's hawkish moves will also add pressure on the capital side with inflation a distant but valid concern.”

Tantiangco said that the external risk of a monetary tightening by the US Federal Reserve by rising policy rates will trigger an outflow of funds from emerging markets back to the United States.

He added that, the Philippine government cannot be expected to be able to give enough support for the recovery of the local economy through stronger spending given its high debt levels.

The Bangko Sentral also cannot be expected to maintain its accommodative monetary policy because, if the economy reopens, demand will strengthen and this will push up inflation.

“Since we can’t expect much from the government now, the burden will be on the shoulder of the private sector,” said Tantiangco.

On the positive side, 2TradeAsia.com said “Capex continuations remain strong on the corporate side, and no major earnings drag is seen (for now).”

“This should not make 2022 any less forgiving of a trading year than 2021, only without the base effect advantage, but with better start-of-the-year fundamentals (45 percent vaccinated and about 6.5 percent GDP the fourth quarter),” the brokerage said.

It remains relatively optimistic about the market though, pointing out that all it needs is a “follow-through event” and that “Strong headwinds in the horizon are likely enough to help the index generate escape velocity towards 8,000.”

Immediate support for the PSEi is seen by 2TradeAsia.com at the 7,100 level while resistance is around 7,300 to 7,400.

For his part, Tantiangco sees the support at 7,000 to 7,100 and, if this does hold, the next support level is at 6,600.

On the other hand, he sees the resistance at the 7,300 level and, if the economy recovers, then the next resistance will be at 7,500.

For investments this year, Abacus advises its clients to be on the defensive given the high risk of a new surge in COVID-19 cases.

“Our defensive posture may be at odds with the ‘reopening theme’ that most are expecting. However, we would rather sacrifice some gains in the face of uncertainty,” it said.

It noted that, “In general, therefore, our top picks for next year have undemanding valuations and are largely ambivalent to either COVID numbers or electoral outcomes.”

“Among our picks is SPNEC (because of low valuation and potentially higher profits due to lower cost per megawatt installed). Another is PGOLD which we reiterate is the cheapest relative to its historical price to earnings range among members of the PSE index,” said Abacus.

It added that, “We also like banks (they are underpriced given that net interest margins are poised to rise) and a few consumer discretionary names like HOME which is the cheapest home improvement retailer in the region and is unaffected by margin concerns.”