Equity market: Tough times in the short term

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RAFAEL GARCHITORENA, chief strategist of Deutsche Regis, remains bullish on the local equity market over the medium term as a strong economic story unfolds. He is quick to warn against short-term challenges the market faces, however.

He is worried that the worst may not be over yet, despite the local bourse’s losses in the past couple of years. Foreign investors continue to be net sellers while locals continue to support the market, providing cushion against excessive drop in the PSEi.

The weakening local currency, growing consumer prices, and increasing interest rates, Garchitorena said, are what the country has to pay as a result of strong domestic demand and policy reforms.

In the medium term, strong economic growth is expected on the back of sustained consumption growth, he added. And some tailwinds can help buoy growth in the form of the recovering manufacturing industry and an ambitious infrastructure plan by the ruling administration.


He stressed, meanwhile, that consistent with the strong consumption story are the double-digit car sales and loan growth. The economy can continue to absorb strong consumption as leverage remains low.

Debts both at the household level (8.1 percent of GDP) and the government (43 percent of GDP) are still below regional peers.

The price of growth, however, needs to be paid, Garchitorena said. Strong domestic demand may lead to local currency weakness, higher inflation rate, and rising interest rates.

For the firms, increasing business costs could come from the government’s difficult but much-needed reforms—restructuring of tax system, redistributive fiscal spending patterns, and increasing social spending.

These reforms will provide short-term headwinds to corporate earnings, Garchitorena said, but may expand the economic base in the medium term. He noted the risk of fiscal slippage, albeit not an immediate risk for now, if the government fails to balance tax cuts and increased spending.

He cautioned that the impact of the weak currency will be felt in two waves: downside risks to earnings because of rising import cost, and persistent foreign fund outflow.

Garchitorena’s advice is that against the backdrop of these challenges, investors ought to be more selective in terms of sectors and/or companies to invest in.

Moving forward, there is a need to generate alpha strategy to survive the market. To monetize the consumption and infrastructure story of the Philippines, he said, there might be opportunities in the retail space and direct construction players.

CZEN BICO

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