The local stock market is seen to remain volatile as sentiment continues to be weighed down by the weak peso, delayed interest rate cuts, and persistently-high inflation.
“Broader market movements last week reflected a more hawkish US Fed, as officials indicated their lack of confidence to proceed with as-planned rate cuts; inflation still printing outside of the 2 percent target remains the main hurdle,” online brokerage 2Tradeasia.com said.
It noted that, “To some extent, speculation to potential further tightening of policy given risks to inflation has made jitters across global markets (from gold to forex).”
“Expect volatility in the medium term as this plot point develops; at this point, consensus has revised Fed rate cut expectations to just 1 rate cut in 2024.
“Interestingly, the BSP harped on 2 potential local cuts starting August, which should only intensify the push-pull speculation over the remainder of the second quarter to early third quarter,” 2Tradeasia.com said.
With midyear expectations shifting alongside changes in the macro environment, the brokerage said volatile input factors late into the second quarter are underscored: weak peso (approaching P59 high last seen in October 2022), choppy crude oil movements, and sticky inflation by up to the third quarter.
These factors are seen to result in some erosion in earnings of listed companies.
Meanwhile, it said “the onset of the rainy season (and likely, La Niña later into the year) should signal some seasonal pivots, e.g. away from volume-based power/water and construction-allied sectors, among others, but also put extra pressure on agri and tourism sectors, in light of weaker-than-expected output in the first quarter.”
2Tradeasia.com said “Bountiful speculation should provide opportunities to range trade, albeit recent headlines have tilted to the downside. That being said, the best entry point is the point of maximum pessimism.”
According to COL Financial Chief Equity Strategist April Tan, “Because of the risks that come with weaker economic growth both here and in the U.S., investors should continue exercising caution despite indications (from the BSP) that interest rates are going down soon.”
“We continue to recommend a more defensive strategy – preferring stocks that belong to more defensive sectors such as power, utilities, telcos, and consumer staples.
“Moreover, if the stock market continues to go up in the short term, manage risk by taking profits on stocks that have gone up and are no longer cheap in terms of valuation,” she added.
Tan said COL is adding BDO Unibank to its stock picks list after noting that BDO, being one of the big three banks in the country, have been performing well lately since demand for loans is picking up, while rising rates have led to higher net interest margins give their large exposure to low-cost savings and current account deposits.
“We expect the profitability of the big three banks to remain strong this year, even if interest rates go down, since lower rates will also reduce the yield on higher cost time deposits while demand for loans should pick up by a faster pace because of lower interest rates.
“Consequently, we believe that the recent correction in the share price of BDO is an opportunity to buy the stock at a more attractive valuation,” She noted.
COL also has a BUY rating on Security Bank which is seen to be one of the beneficiaries of the country’s economic growth as it continues to grow its intermediation business. The bank’s high capital ratios and liquid balance sheet will allow it to pursue such opportunities for growth in the medium term.
Furthermore, investments that the bank is currently making in people and technology are expected to come online within the next few years, potentially leading to improved profitability.
For Abacus Securities Corporation, the more recent weakness in Aboitiz Equity’s stock due to its deletion from the MSCI index is an opportunity to bargain hunt.
“Fundamentally, the conglomerate will benefit starting second quarter from reduced costs in Union Bank leading to a more pronounced positive impact from the Citi acquisition, and a full quarter impact from the consolidation of Coke Philippines.
“The full quarter impact starting the second quarter, strong sales volume growth of 16 percent in the first quarter which is expected to improve further with increased demand during the summer months, and the falling price of sugar should all redound positively to AEV,” it noted.
Abacus is also bullish about prospects of D&L Industries noting that its “potential for growth is evident on its faster than expected ramp up of its new Batangas plant as well as a boost in the biodiesel blend.”