The new trading year is seen to start with its traditional burst of optimism but whether this will be sustained will depend on domestic and global economic developments starting with the Philippines’ December 2022 inflation report this week.
“In the last 5 years, from the previous year’s close to the first trading Friday of the current year, the local market has gained by 1.46 percent on average,” said Philstocks Financial Research Manager Japhet Tantiangco.
From 2018 to 2021, the Philippine stock market rose from previous year’s close to the first trading Friday, with 2019 posting the highest at 3.95 percent. During this period, the PSEi posted a loss during its first trading week for the year only in 2022.
“The period observed shows that investors have greeted the new year with optimism attributed to positive economic and corporate outlooks. For the same reasons, we may see the market move with an upward bias in its first week this 2023,” Tantiangco said.
“The arrival of 2023 marks several noteworthy events that may move local equities, on top of volumes expectedly making a rebound after December's series of public holidays,” said 2TradeAsia.com.
It added that, “The first inflation report of the year is due next week, with consensus slanted towards 8 percent, due to higher agri-commodities, electricity rates, and pull factors from seasonal demand.”
Tantiangco said “The local market ends the year with a price-to-earnings (PE) ratio of 14.51 times, lower compared to its 5-year PE ratio average of 20.58 times. This conveys that there are still bargain opportunities in the bourse.”
Abacus Securities Corporation said earnings per share (EPS) for the PSEi is projected to grow fastest in the region next year but noted that, “the gap with other exchanges is not large and would not warrant an overweight from foreign funds. Moreover, like GDP growth, corporate earnings are just catching up and not really outperforming.”
It added that, “The PSEi’s EPS growth will be the highest in the region only because it was the last to climb out of a very deep hole. Other factors will have to come into play if the index is going to have a happy new year.”
For 2023, Tantiangco said the local economy is still expected to continue with its expansion though at a slower pace compared to 2022 which is so far going at 7.8 percent (average real GDP growth in the first 3 quarters of 2022) due to perceived challenges from high inflation, to rising interest rates, to global economic headwinds.
“With the market at attractive levels, together with the local economy’s growth prospects, we see the bourse moving with an upward bias this year,” he said.
However, Tantiangco noted that, “a strong rally may not be seen yet as investors also deal with risks that tempers growth prospects. This includes the country’s inflation situation, rising interest rates, and a possible global economic slowdown amid lingering headwinds from the US’ monetary tightening, to the Russia - Ukraine war, to China’s COVID-19 situation.”
“Unfortunately, Covid’s long shadow will continue to affect equity markets (this) year. It is definitely going to have a milder impact but it will still be a drag,” said Abacus.
It noted that, “After falling to the lowest since the very early part of the pandemic in early November, the global number of reported Covid cases is again trending higher. We actually expected the WHO to declare an end to the pandemic (in December) but what appears to be over is only the emergency phase.”
“The pandemic probably won’t be considered over, or won’t transition to endemic status, until deep into 2023. So while most investors are looking at Covid as if it were in the rear view mirror, the truth is the global economy is still suffering the long-term effects of the pandemic,” said Abacus.
Tantiangco said hopes for a stronger rally hinges on factors including a decline in the Philippines’ inflation rate “which is possible due to the past policy rate adjustments by the Bangko Sentral ng Pilipinas, a slowdown in the monetary tightening of the BSP and the Federal Reserve (in terms of size and frequency), and a resilient global economy may spur optimism.”
But, Abacus said “Interest rates may put a cap on how high equity prices will go is 2023, especially in the first half of 2023. Unless there is a recession in the US, we don’t think the Fed will cut rates at any point next year and so neither will the BSP.”
“This will be a negative since the emerging consensus is that Philippine GDP growth is going to slow dramatically in 2023,” it added noting that, BSP Governor Medalla has said more than once that inflation is more damaging than slower growth.
“So, again, the theme for interest rates is ‘higher for longer’ and this will be a constraint on equity valuations,” said Abacus.
In the face of uncertainties over the macro picture for 2023, 2TradeAsia.com said “the strategem remains intact, that is, prioritizing quality over market impulses, as balance sheets have yet to fully adjust to the impact of less forgiving cost of capital plus consumer confidence is expected to fall year-on-year no thanks to a cooling global economy.”
It noted that, current stock valuations imply “opportunities to double down on 'sunrise positions, such as those with a clear free cash flow runway over the next 6 to 12 months. Our screening remains biased towards defensives on this regard (power and banks), plus select market movers in gaming and property.”
“Looking to retest 6,800-7,000 in the medium-term, the PSEi is trying to break free of a short-term technical rout; data-driven events in January might help push this along,” the brokerage said.