The local stock market had a very bullish 2017, setting all-time highs not once but 14 times. That year, the 30-member Philippine Stock Exchange index (PSEi) closed at 8,558.42, its best-ever performance. “[In] 2017, people really made money,” Grace Cerdenia, president of 2TradeAsia, an online trading platform, told BusinessWorld in an interview.
The bellwether had surpassed that figure a handful of times this year, finishing at above 9,000 points near the end of January. Investors were clearly buoyed up by positive developments, including stronger government spending, particularly on its large-scale “Build, Build, Build” infrastructure program, the rollout of the tax reform program, and a generally robust economy.
But the bull run soon petered out. In the last few weeks, the PSEi was trading below its 2017 finish. And last Monday, it closed at 8,235.54. Apparently, market enthusiasm was giving way to fears of inflation resulting from higher excise taxes that the Tax Reform for Acceleration and Inclusion (TRAIN) law has imposed, and of interest rate hikes.
These fears, however, might not be as dire as they seem. Ms. Cerdenia pointed out that the “inflation kick” the country has been seeing since the start of the year is “transitory” (Inflation rate hit 4% in January, and 4.5% in February) and that interest rates are at “historically low” levels, so increasing them will just “level things.”
2TradeAsia expects inflation to remain manageable despite the cost-push factor from higher taxes on fuel and coal. Likewise, it sees prices of food items remaining stable as long as there is no major agricultural catastrophe.
Meanwhile, the company anticipates two interest rate increases, each at 25 basis points, which will serve to temper inflation and money supply flow from the Fed’s rate hike. Higher interest rates, Ms. Cerdenia noted, spell better earnings for banks but make it harder for other companies to borrow money.
Broad money growth, 2TradeAsia also believes, will remain in check as financial institutions place excess cash into additional investments in marketable debt papers and higher net foreign asset holdings.
The depreciating peso has also been raising concerns. But Ms. Cerdenia said it’s a double-edged sword. “A weaker peso is bad for companies with dollar-denominated debts, but it’s good for consumers benefitting from OFWs and companies that engage in exports,” she noted.
2TradeAsia sees the market reaching 10,100 points this year, though it also anticipates some “detours” to 7,900, 8,700 and 9,400 points. “We see these different detours… as opportunity to buy,” Ms. Cerdenia said.
Among the factors that the company think will drive the growth of the market is the big-ticket infrastructure project of the government.
“The government spending on the infra side will definitely experience a significant spike,” she said. 2TradeAsia noted in its 2018 Economic Outlook handbook that since most projects under the program are under the development stage, market movers still have time to participate in biddings.
Another is increased purchasing power, a result of the lower personal income tax provision of the TRAIN law. In 2TradeAsia’s computations, broad-based salary workers who are single and without dependents must be seeing a 22% increase in purchasing power if they are earning P20,000 a month, and 10.7% if their monthly salary is P100,000. “Because of that increased purchasing power,” Ms. Cerdenia said, consumer spending “will improve.”
Higher capital expenditures by listed companies are also expected to fuel the growth of the market.
According to 2TradeAsia, capex rollout was high in 2017 because companies were riding on the government’s aggressive move to accelerate economic growth. They raised their capital expenditures by as much as 18%, Ms. Cerdenia said. The property sector was the most “capex-aggressive,” followed by the power and telecommunication sectors.
“With the big names upgrading their capex initiatives even higher for 2018, we estimated at 21%, we can outperform 2017. We believe it’s warranted,” Ms. Cerdenia said.
Other factors that 2TradeAsia have identified are the possibility of lower corporate income tax, a component of the second tax reform package, and the feeling that another credit rating upgrade is in the cards. Ms. Cerdenia said the upcoming first-quarter earnings reports will give investors “a clearer direction.”
The robustly growing economy should also encourage them to build their hopes up, because, Ms. Cerdenia said, when the overall economy is healthy, the stock market “tends to follow.” “From an average of about 6.8%, 6.7% last year, we’re looking at 7.2% this year and roughly about 7% for 2019,” Ms. Cerdenia said, referring to the growth trajectory of the Philippine economy.