Market volatility seen ahead-A A +A
Monday, October 14, 2013
METROBANK equity arm First Metro Securities Brokerage Corp. (FMSBC) sees bouts of market volatility ahead.
“Unlike the past year when the market was a buy, the next 12 months may be volatile,” said Reuben Mark Angeles, head of research at FMSBC.
Angeles said that based on their market research, there are three factors that support market volatility ahead, including increasing signs of economic normalization in developed markets, intact economic growth and challenging market valuations.
He said that despite economic uncertainties, investors remain confident knowing that central banks of developed markets are there to protect them but he stressed that the market will be “very volatile” as US Fed tapers and the so-called safety nets by central banks will soon unravel on the back of the economic conditions of Japan, Europe and the US.
The US Fed embarked on a quantitative easing policy that involved massive bond–buying in order to keep interests down and stimulate the US economy. Although this policy aims to improve the economic conditions in the US, it impacted economies in emerging markets.
Market valuations in the next months are also challenging. They predicted robust corporate growth profit but slower earnings per share (EPS) growth. Puregold, for example grew by 43.5 percent in the second quarter this year but its EPS growth stood at 3.5 percent.
But while all these happen, Angeles noted the Philippines’ growth story will be intact. He said growth in 2014 will be “above average” albeit slower than this year’s.
He said that if we see more private-public partnership rolled out, “it warrants an upside risk in growth.”
Price-Earnings, on the other hand, will likely contract in the next 12 months, depending on investor confidence. Although valuations are better than this year’s, the company sees bond yields rising globally, peso not appreciating strongly, foreign inflows sputtering and market valuations becoming challenging, said Angeles.
Options for investors
Given the expected volatility, FMSBC recommends investors to either ride the volatility through short- and medium-term trading or absorb the volatility or do long-term trading.
For the short term, Angeles said they prefer stocks with strong foreign buying momentum. For the long term, they prefer to invest in stocks whose growth is highly correlated with the Philippine economy and whose earnings are visible in the next 12 months.
FMSBC research analyst Ghia Paula Yuson said that for long-term trading, they are looking at “defensive sectors” like consumer (like food and beverage) and banks as these sectors can ride on the country’s economic growth.
Universal Robina Corp. (URC) and Jollibee Foods Corp. are the top picks for consumer exposure as their growth trajectory are on track and they have potential for further re-rating from the Asean expansion, Yuson said.
These companies have the potential to grow further given their popularity among the young demographics. “They have strong domestic market and they are at the same time looking at global expansion,” she said.
Jollibee accounts for 63.2 percent of the fastfood market. URC, on the other hand, accounts for 28 percent in the sweet and savory foods market and 68.3 percent in the ready-to-drink tea market.
She said the Philippines is a consumption-driven economy with food and beverage seen to rise at 8.2 percent per year in the next five years. Population is projected to grow at an average of 2.2 percent per year.
As for banks, Yuson recommends preference for large bank exposure as macro prospects remain positive. They are also not ruling out any merger and acquisition in the next two to three years.
She said Bank of the Philippine Islands (BPI) and Metrobank are the top picks. BPI has high operating efficiency and highest return of equity while Metrobank has potential upward re-rating from shifting focus to consumer sector as well as efficiency improvements.
BPI’s total asset stood at P761.5 billion with total loans of P372.9 billion and total deposits of P591 billion. Metrobank, on the other hand, has total assets of P801.7 billion, with total loans of P421.9 billion and total deposits of P599.9 billion.
She said the top banks have remained stable in their profitability despite the challenging times.
Published in the Sun.Star Cebu newspaper on October 15, 2013.