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Tax reform, infrastructure spending seen to boost PHL stocks

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PSE

PSEBy Krista Angela M. Montealegre, National Correspondent

LOCAL equities could enjoy an upward re-rating should the government successfully implement its tax reform and accelerated infrastructure spending program, though investors must be more selective in their stock picking since a rising tide is no longer lifting all boats, BDO Nomura Securities, Inc. said on Friday.

In a briefing in Makati City, BDO Nomura Senior Vice-President and Head of Research Dante R. Tinga, Jr. said it is overweight on the Philippines in a regional context, as the underperformance of local stocks since June last year has made valuation and positioning relatively more attractive, especially since growth prospects remain largely intact.

The benchmark Philippine Stock Exchange index (PSEi) is up by less than 1% from the closing level of 7,796.25 on June 30.

BDO Nomura is setting a 12-month target for the PSEi at 8,500 with property, industrials, conglomerates, and small- to mid-cap consumer companies delivering the growth.

“We have yet to assume the implications of tax reform and accelerated infrastructure spending on our numbers. What will simply happen is if these two factors happen, it will amplify our view on the stocks and sectors we like,” said Mr. Tinga, who tagged the two developments as “potential game changers.”

The positive macroeconomic backdrop has yet to translate to a broader increase in corporate profit growth given the deceleration of earnings in larger-cap sectors such as consumer, telecommunications and utilities, which form a huge part of the PSEi, he said.

The Philippines continues to trade at a “historical and relative to peers premium” of 18.9x 12-month forward price to earnings (PE) ratio despite sluggish earnings growth, rising interest rates and weak currency. Mr. Tinga said a bottom-up analysis — an investment approach that focuses on an individual company instead of the industry it is operating on — is needed to identify bargains at these levels.

“Gone are the days when the Philippines is growing fast and you buy stocks and easily make money,” Mr. Tinga said.

BDO Nomura’s top picks are Ayala Land, Inc., Aboitiz Power Corp., Century Pacific Food, Inc., International Container Terminal Services, Inc., Metropolitan Bank & Trust Co., Megaworld Corp., Metro Pacific Investment Corp., Puregold Price Club, Inc., Robinsons Retail Holdings, Inc., and SM Investments Corp.

Backed by robust domestic demand which is the strongest in Asia, the country’s gross domestic product (GDP) is expected to grow by 6.7% and 6.8% in 2017 and 2018, respectively, despite headwinds from rising rates, peso weakness and geopolitical uncertainties, Mr. Tinga said.

The country’s middle income class is expected to grow rapidly in the next two decades, boosting the number of potential equity investors in the local market, BDO Nomura said.

Since its launch in October, more than 15,000 accounts have been opened through the BDO Nomura online trading platform as of end-June 2017, making it the 26th biggest stock broker in the Philippines with a market share of 0.74%.

BDO Nomura President Koichi Katakawa attributed the strong growth to the reliability of the BDO brand name, the Philippine bank’s expansive market presence and the strong market research capability of Nomura Holdings of Japan.

“We have just barely scratched the surface. There’s still a huge market out there waiting to be tapped,” BDO Nomura Chairman Eduardo V. Francisco said.

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