COL Financial: PSEi spending rest of 2014 in consolidation

Shares on the Philippine Stock Exchange will stay in consolidation mode for the rest of 2014 as rising inflation, political noise and high stock valuation keep market sentiment at bay, online brokerage COL Financial Group Inc. said Thursday.

 

All these concerns are also giving foreign investors enough reasons to entertain second thoughts before taking positions in the market.

 

"The market will most likely remain weak," assistant vice president and head of research April Lynn Tan told reporters in a briefing in Mandaluyong City. "Valuations are no longer cheap that's why investors are avoiding the local stock market," she said.

 

"And after briefly coming back in the market this June, foreign investors are once again exiting due to rising inflation and concerns about political noise about the DAP," she added.

DAP

 

Last July 1, the Supreme Court declared as unconstitutional certain acts under the Aquino administration's Disbursement Acceleration Program (DAP).

 

President Benigno Aquino III highlighted the benefits of DAP during his fifth State of the Nation Address  before the 16th Congress last Monday , but also asked lawmakers to pass a joint resolution clarifying the definition of terms related to government spending, such as savings.

 

Meanwhile, inflation in January to June settled at 4.2 percent, at the upper end of the 3 to 5 percent government target for the full year.

 

These dampeners will cause more volatility in the second half, more of an up and down movement, COL Financial vice president Juanis Barredo said in the same briefing.

 

"With more choppiness in the second half, it is possible to have corrective action but it would open another trading opportunity for trading range," he said.

 

Resistance is seen at 7,000 on the PSEi, while the support at 6,816 is currently being tested.

 

To break the consolidation phase, Barredo said the index may need to slip back to 6,500 to 6,700 for better valuations.

 

"When consolidation comes, there will be a point where analysts will roll over analyses to 2015 and is generally better than this year," he said.

 

The PSEi is expected to exit consolidation in 2015 and reach a new high of 7,800 by the end of next year, Tan said.

 

"One of the reasons for our bullish outlook next year is the pace of monetary tightening is lower than what everybody expected," she said. 

 

In May 2013, the Federal Reserve began hinting of tapering its bond purchases. The hints materialized in December with a definitive statement from the Fed and the actual taper started in January 2014.

 

The European Central Bank, meanwhile, reduced its base rate from 0.25 percent to 0.15 percent and introduced a negative deposit rate of 0.1 percent in June.

 

"In 2015, we believe that growth will gain momentum as we start to enter that sweet spot in the demographic window," Tan said.

 

She noted the window is a period of high economic growth brought about by the large number of people entering the productive ages of 21 to 25. 

Breakout likely in 2015

Consumer spending and infrastructure spending will also drive economic growth next year, Tan said.

 

"On public-private partnerhsips (PPP), there's a chance more will be awarded before the end of the Aquino administration as several projects might be bid out before the year-end," she said.

 

Among the breakthroughs Aquino mentioned in his SONA was the seven PPP projects with a combined value of P62.6-billion so far awarded during his term.

 

In addition, more investors will enter the market next year as fundamentals are expected to catch up with high valuations, Tan noted.

 

"If the market continues to trade between 6,800 to 6,900 level, the PSEi would be trading at a P/E ratio of 16.9 times," she said.

 

Currently, the market is trading at a P/E ratio of over 19 times. – VS, GMA News