HSBC ‘neutral’ on PH equities following 2018’s volatile ride

Credit to Author: MAYVELIN U. CARABALLO, TMT| Date: Tue, 22 Jan 2019 16:24:43 +0000

HSBC is keeping a neutral outlook for the Philippine stock market following a volatile ride that saw the benchmark index end 2018 in the red after record highs at the start of the year.

In a report on Tuesday, the banking giant said the Philippine equity market was the worst-performing in the region in 2018, with high inflation and high interest rates having hurt share prices.

The benchmark Philippine Stock Exchange index (PSEi) closed 2018 at 7,466.02, down nearly 13 percent from the start of year and also well below a record high of 9,058.62 hit in January.

One factor said to have weighed on share prices as 2018 progressed was a series of Bangko Sentral ng Pilipinas (BSP) policy rate after inflation breached the 2.0-to-4.0-percent target starting March.

“This led to a fall in valuations, with the market trading at a significant discount to its 5-year average valuations at -8 percent on 12m fwd PE (12 month forward price-to-earning ratio),” HSBC noted.

Looking at longer-term or 10-year valuation, however, it said the market’s discount narrowed to -1 percent.

With this as a backdrop, the lender said it “remains neutral on the Philippines equity market in an Asean (Association of Southeast Asian Nations) context,” emphasizing that while near-term risks to inflation are tilted to the upside, any sign of inflation abating could act as a positive catalyst.

It said inflation could average 3.8 percent this year before returning more firmly within the BSP’s target in 2020 at 3.4 percent.

“Our main concerns, however, are declining margins and ROEs (return on equity),” HSBC said, adding that margins are likely to remain under pressure as infrastructure improves and market access becomes easier, leading to more competition.

It also noted that the consensus earnings outlook for 2019 was too optimistic at 12.4 percent given downside risks to the economy from tighter domestic liquidity and higher interest rates, with government infrastructure demanding more liquidity from the system.

“These factors could risk crowding out private investment,” HSBC said.

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