PSEi seen to languish at 6,000 level

MANILA, Philippines — AB Capital Securities Inc. is keeping its Philippine Stock Exchange Index (PSEi) target at 6,000, saying cheap valuations alone are not enough to fuel a sustained market rally.

AB Capital president and CEO Hazel Tañedo said Philippine equities had already undergone a substantial derating, with the PSEi trading at just about 9.6 times forward earnings from nearly 20 times several years ago.

READ: PSEi slips on lack of fresh catalysts

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This suggests much of the bad news has already been priced in, providing some downside support. But Tañedo said the catalysts needed to push valuations higher remain elusive.

“The problem today is no longer valuation, it’s conviction,” she said during AB Capital Securities’ market outlook presentation.

Until a broader rerating takes shape, AB Capital prefers stock picking over buying the market as a whole.

Its eight “highest-conviction” names are Globe Telecom Inc., International Container Terminal Services Inc., Jollibee Foods Corp., Manila Water Co. Inc., JG Summit Holdings Inc., Aboitiz Power Corp., Puregold Price Club Inc. and BDO Unibank Inc.

Base case

“Do not buy the market just because it’s cheap,” Tañedo said. “Buy the companies where the earnings and catalysts give you a reason to believe that cheapness can actually close.”

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AB Capital’s 6,000 PSEi base case assumes a 3.8-percent earnings per share growth and a target price-to-earnings ratio of 9.3 times.

Tañedo said earnings growth remains too modest to drive the index significantly higher.

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Foreign investors also remain largely absent, while improving economic conditions have yet to translate into a broad earnings upgrade cycle.

The stock brokerage said earnings growth has also been uneven. Utilities are among the positive contributors, while property companies and conglomerates remain slight drags.

Foreign participation will be particularly crucial for a market-wide rerating, it added, with foreign ownership and trading activity currently near cycle lows.

Bear, bull scenario

Under its bear case, the PSEi could fall to 5,100 if global interest rates stay high, the peso weakens beyond P62 against the dollar, borrowing costs rise and earnings growth falls below its current forecast.

On the upside, AB Capital sees the index reaching around 7,100 to 7,200 under a stronger rerating scenario.

READ: BSP to go easy on raising rates despite high inflation

This would require catalysts such as an earlier US Federal Reserve easing cycle, a clearer reversal of the Bangko Sentral ng Pilipinas’ monetary tightening policy, better government fiscal execution, stronger corporate earnings and the return of foreign investors.

Potential market transactions, such as the GCash and Vitro initial public offerings, are likewise seen to help draw attention and liquidity back to local equities. INQ