The Philippine Stock Exchange’s benchmark, the PSEi, is seen to end the year at the 7,000 level as a favorable economic landscape is unfolding with lower interest rates and an easing inflation rate. 

“Our bottom-up analysis suggests a target of 7,000 for the PSEi in 2024, implying a forward price-to-earnings (PE) ratio of 12.6 times,” said Unicapital Securities in its mid-year outlook. 

It noted that, “This is slightly lower than our previous target of 7,200 as we now expect lower reduction in policy rates by the Bangko Sentral ng Pilipinas of 25 to 50bps (basis points) from our previous estimate of 50 to 75bps).”

“We expect easing key policy rates in the second half of 2024 with up to a 50bps rate cut, driven by a cooling inflation rate. 

“The inflation rate is anticipated to drop further in the coming months due to the recent rice tariff reduction from 35 percent to 15 percent, effective July 5 and continuing until 2028,” Unicapital said. 

Rice accounts for about half of the Philippine headline inflation. In July alone, there was a slower annual growth rate of 20.9 percent for rice from 22.5 percent in the same period last year. 

“We expect this trend to continue in the following months with the tariff reduction,” it noted.

The brokerage said that, “a sustained deceleration of inflation and modest gross domestic product growth should support our view of easing policy rates.”

Meanwhile, on the US front, Unicapital expects the US Federal Reserve to cut interest rates at its next meeting on September 2024. 

“Overall, increased consumer spending due to lower interest rates should support our GDP forecast of 5.8 percent to 6.0 percent for 2024, near the low-end of the government's target of 6.0 percent to 7.0 percent.

“Additionally, higher infrastructure spending should help achieve this growth target. This year, we expect infrastructure spending to account for five percent to six percent of GDP,” it added. 

Unicapital said the PSEi is currently trading at an appealing valuation of just 11.0 times its 2024 PE ratio. This is relatively cheaper compared to its peers, particularly the US with Dow Jones and S&P 500 trading at 20 times and 22.5 times, respectively. 

Lower interest rates will translate to a reduction in cost of capital for listed companies although the brokerage warned that there are downside risks such as prolonged elevated interest rates and escalation of geopolitical tensions disrupting trade supply. 

Under this improving macroeconomic environment, the Property sector stands to benefit from anticipated reductions in interest rates, which are likely to lower mortgage rates. 

The Consumer sector should see positive effects from increased consumer confidence and lower inflation while the Banking sector may see accelerated loan growth and stable asset quality. 

The Power sector is expected to gain from reduced capital costs for expansion as the revival of travel to pre-pandemic levels should boost tourism and gaming industries.