WHAT HAPPENED LAST WEEK 

The Philippine Stock Exchange index (PSEi) closed at 6,530.04, dropping 211.36 points, or by 3.14% week-on-week. The local index tracked global markets after the European Central Bank (ECB) announced its plans to raise rates in July and September to combat inflation – the first time in 11 years. Also, the continued increase in international oil prices (above USD 120/barrel), as well as the hike in domestic pump prices last week, weighed heavily on investor sentiment. 

Top index performers were AC Energy (ACEN) up 6.3%, Wilcon Depot (WLCON) up 1.9%, and Globe Telecom (GLO) up 1.6%, while index laggards were Converge (CNVRG) down 7.5%, Megaworld (MEG) down 6.1%, and International Container Terminal Services (ICT) down 6.1%. The index breadth was negative with five gainers versus 23 losers. Average daily turnover value was PHP 5.2 billion. Foreigners were net sellers by PHP 2.6 billion. 

WHAT TO EXPECT THIS WEEK 

The market is expected to trade downwards following the release of the higher-than-expected US inflation print for May 2022 at 8.6% (consensus estimate: 8.3%; April 2022: 8.3%) released last Friday. Contributing to continued risk-off sentiment will be the next round of domestic pump price hikes (diesel: PHP 4.20-PHP 4.40/L; gasoline: PHP 1.40-PHP 1.60/L) on Tuesday, June 14. Investors will also be closely monitoring the interest rate decision by the US Federal Reserve on Thursday, June 16 (consensus estimate is 50 bps). 

STOCK PICKS FOR THE WEEK 

SM Investments Corp. (SM) — BUY 

SM continues to be in an advantageous position to leverage the economy’s reopening, given its large exposure across sectors where we expect recovery to be robust (e.g., retail, real estate, and banks). Accumulate SM once it breaks above the 100-day moving average price at PHP 893.00. Set cut loss below PHP 840.00. Take profit at around PHP 1,000.00/PHP 1,100.00.  

Petron Corp. (PCOR) — BUY  

PCOR booked core net income of PHP 1.8 billion in the first quarter of 2022 (1Q2021: PHP 55 million), is above consensus estimates, mainly due to higher sales volume and pump prices. Despite the better-than-expected earnings, PCOR’s share price is still trading near its key support area at around PHP 3.00. PCOR will benefit from the increase in mobility and the completion of its powerplant this year, which will allow the company to efficiently generate steam and power for the Petron Bataan Refinery. The optimal strategy is to assume the consolidation period will continue and buy at or near the key support level. Accumulate PCOR at current levels until PHP 3.10. Set stop limit orders below PHP 2.95. Take profit at around PHP 3.80/PHP 4.00. 

PhilWeb Corp. (WEB) — BUY 

Because vaccinated foreigners were finally allowed to enter the Philippines and gaming companies were given clearance to resume activities at a higher capacity for as long as they comply with minimum health standards, PhilWeb’s share price rebounded. It formed an intermediate-term bullish pattern, a symmetrical triangle, with a measured target price of PHP 5.10 to PHP 5.40. Accumulate WEB once it breaks above PHP 4.20 (buy on breakout). Set cut loss below PHP 3.95. Take profit at around PHP 5.00/PHP 5.40. 

PSEi TECHNICAL ANALYSIS 

Resistance: 6,800 / 7,200 

Support: 6,400 / 6,180 

The market failed to sustain its three-week rebound and formed a rising wedge, a bearish continuation pattern. Once the PSEi continues to pull back and breaks below 6,400, the market will likely retest 6,180. 

 TRADING PLAN 

 Set stop limit orders, especially below 6,400 to protect capital. Support levels are currently at 6,400/6,180. Accumulate more once the PSEi breaks above 7,200. 

KEY DATA RELEASES 

Wednesday, June 15, 2022 

• US retail sales (excluding auto) month-on-month for May 2022 (consensus estimate: 0.8%; 0.6% in April 2022); 

Thursday, June 16, 2022 

• US central bank interest rate decision (consensus estimate: 50 bps increase) 

Friday, June 17, 2022 

• Overseas Filipino (OF) remittances year-on-year for April 2022 (consensus estimate: 3.5%, 3.2% in March 2022) 

In March 2022, President Rodrigo Duterte signed into law Republic Act No. 11659, otherwise known as the Amended Public Service Act (PSA), a move that would further liberalize the Philippine economy.  

The highlight of the amendment is the new definition of what a public utility is.  

A public utility is a public service that operates, manages, or controls for public use either the distribution or transmission of electricity, the petroleum and petroleum products pipeline transmission systems, the water pipeline distribution systems and wastewater pipeline systems such as sewerage pipeline systems, seaports, or public utility vehicles. As such, all companies engaged in these services are subject to the 40% foreign ownership limit. 

The amended law also introduced critical infrastructure, which refers to any public service that owns, uses, or operates systems and assets, whether physical or virtual, that are so vital to the Philippines that the incapacity or destruction of such would have a detrimental impact on national security, including telecommunications (telco) and other such vital services as may be declared by the president of the Philippines.  

Under the amendment, telco shall refer to any process which enables a telco entity to relay and receive voice, data, electronic messages, written or printed matter, fixed or moving pictures, words, music, visible or audible signals, or any control signals of any design and for any purpose by wire, radio, or other electromagnetic, spectral, optical, or technological means.  

Excluded in the definition are passive telecommunications tower infrastructure and components, such as, but not limited to, poles, fiber ducts, dark fiber cables, and passive telco tower infrastructure as defined by Department of Information and Communications Technology (DICT), and value-added services, as defined in R.A. No. 7925, or the Public Telecommunications Policy Act, as amended. 

Significant changes 

1. These industries are no longer considered public utilities: telecommunications, domestic shipping, railways, subways, expressways, tollways, airlines, and airports. 
2. Foreign nationals cannot own more than 50% of capital in public services engaged in the operation and management of critical infrastructure, unless their country accords reciprocity by allowing the same to Philippine nationals, or providing rights of similar value in other economic sectors. 
3. Foreign state-owned enterprises are prohibited from owning capital in any public service classified as a public utility or critical infrastructure. This will not affect existing telcos but no additional investments are allowed.  
4. The President has the authority to suspend or prohibit proposed mergers, acquisitions, or investments in public services that result in giving control to foreign investors. 

Industry impact 

The exclusion of the said industries from the definition of public utility removes the 40% foreign ownership limit. Initially, the amendment of this law was seen to have significant implications for the telecommunications sector. However, given the details of the amendment, foreign ownership in this sector can only go above 50% if the foreign investor’s home country grants reciprocity to Filipinos.  

Regardless, the signing of the amendment is a welcome development for easing the country’s FDI restrictiveness (see Figure 1) which appears to be the highest in the region as of 2020. The law will also enhance competition and attract more investments in the country, particularly in industries where the foreign ownership limit has been removed.  

Ultimately, this will help accelerate economic recovery and benefit all Filipinos. 

The Philippines can attract more foreign direct investment with less restrictive regulations and laws.

JOBELLE LANTIN is currently a Research Officer under the Portfolio Strategy and Advisory Division of Trust Banking Group and a former portfolio officer for retail clients. She is a strong advocate of financial literacy and inclusion. Outside of work, she likes trying out different kinds of wines and has started her journey towards acquiring her Wine & Spirit Education Trust (WSET) certifications in order to gain skills in identifying wines and their respective tastes accurately.

Much has been said about the 63% debt-to-GDP ratio of the Philippines, that it is supposedly “beyond the 60% debt threshold” set as some sort of international benchmark. However, there is no such thing as an established debt threshold above which an economy will likely start collapsing.

In fact, there are arbitrary debt thresholds set at different levels by different entities that have no common basis with any idea that breaching such threshold would mean economic collapse. Yes, thresholds are set, but these are arbitrary and only relevant to an end in mind. It does not mean doom and gloom.

For example, to be part of the Euro zone at the onset, European countries that wanted to ditch their currencies (deutschmark, francs, etc.) in favor of the euro had to fix their debt-to-GDP ratio at a 60% ceiling, among other things, before monetary union could be established. It did not mean that these economies would collapse with debt beyond the 60% ceiling set, as this only meant that they could not join the Euro zone.

However, there is one kind of debt that is dangerous if unmanaged, and that is foreign currency debt, here simplified as dollar debt for ease of discussion. The country cannot create its own dollars, so it will have to rely on dollar revenues to pay for any dollar debt incurred. Of course, it can always buy dollars in the market or borrow even more dollars to pay for dollar debt that is falling due.

This is very different from domestic or peso debt, as the country can always “print” more pesos to pay for peso debt, the peso being the home currency of the country. For example, US debt is more than 100% of its GDP, while Japan’s debt is more than 200% of its GDP. However, it is not problematic per se for these countries as their debt is denominated in their respective home currencies – the dollar and yen.

So clearly, breaching a 60% debt-to-GDP ratio is a non-event as the more pressing issue is about how much is the dollar debt and how much are the assets (called Gross International Reserves or GIR) backing up the debt, to simplify things. More to the point, the total amount of dollar debt that falls due in the short term versus how much dollar assets or GIR the country has on hand is the more critical issue.

Let’s now compare the Philippines vs. Sri Lanka as of yearend 2021:

Clearly, the Philippines is in no way near the situation of Sri Lanka. The latter has USD 8.4 billion to pay in the short term and it has only USD 1.2 billion in dollar reserves, so it must borrow dollars to pay its dollar debt in a classic Balance-of-Payment (BOP) crisis. The Philippines, on the other hand, can pay all its dollar debt of USD 106 billion with its USD 108.8 billion in dollar reserves, but that’s not even the issue. The critical part is only the USD 15.1 billion dollars in short term debt. So, the country can pay all its short-term dollar debt and have spare dollars for continued imports without having to borrow dollars at all.

There are all kinds of indebtedness and the Philippines is not bankrupt at all despite its 63% debt-to-GDP ratio, principally because its debt is manageable and its dollar debt is more than 100% backed up by dollar assets. Clearly, the Philippines is not Sri Lanka.

MARC BAUTISTA, CFA, is Vice-President and Head of Research & Business Analytics at Metrobank, in charge of the Bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and also loves learning other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.

WHAT HAPPENED LAST WEEK 

The Philippine Stock Exchange index (PSEi) managed to close marginally higher by 15.26pts, or up 0.2% week-on-week, to end at 6,726.14. The local bourse tracked its Asian peers at the start of the week amid the easing of COVID-19 curbs in Beijing and Shanghai. By mid-week, risk aversion due to inflation fears and monetary tightening weighed on sentiment after oil prices surged following the agreement of the European Union’s leaders to a phased ban on Russian oil. Bangko Sentral ng Pilipinas (BSP) Gov. Benjamin Diokno commented that May inflation likely settled between 5.0%-5.8%, which is faster than the 4.9% in April, due to higher costs of fuel and food as well as the depreciation of the peso.

The US labor market added 390,000 jobs in May 2022 (consensus estimate: 328,000; April 22: 436,000). The job gains came from the leisure and hospitality (84,000) and professional and business services (75,000) sectors. The unemployment rate stood at 3.6% (consensus estimate: 3.5%; April 22: 3.6%). Labor force participation rate rose to 62.3% (consensus estimate: 62.3%; April 22: 62.2%), with the total labor force now within 207,000 of pre-pandemic levels. Wage growth came in at 5.2% year-on-year (consensus estimate: 5.2%; April 22: 5.5%).

Top index performers were JG Summit Holdings (JGS) which was up 5.1%, Ayala Land Inc. (ALI) up 4.0%, and San Miguel Corporation (SMC) up 3.6%, while index laggards were Monde Nissin (MONDE) which was down 13.1%, Globe Telecom (GLO) down 7.8%), and Converge (CNVRG) down 3.9%. The index breadth was positive with 17 gainers versus 12 losers. Average daily turnover value was PHP 11.3 billion. Foreigners were net sellers by PHP 1.0 billion.

 WHAT TO EXPECT THIS WEEK 

The market is expected to face some downward pressure early in the week given the following: (i) the anticipated oil price hike by as much as PHP 6.40 to PHP 6.70/liter on diesel and PHP 2.65 to PHP 2.80/liter on gasoline pump prices; and (ii) the country’s May 2022 consumer price index (CPI) report on Tuesday estimated to settle at 5.4%, higher than the BSP’s 2-4% target range and full year forecast of 4.6%.

On the international front, investors will be closely monitoring the upcoming US CPI report on Friday, which is projected to come slightly cooler at 8.2%. Some economists say that with this, they can confirm that inflation has already peaked – a possible catalyst for the market.

STOCK PICKS FOR THE WEEK 

PLDT, Inc. (TEL) — BUY

After TEL’s trading range narrowed in the past months, the stock broke out with significant volume, confirming the formation of the bottom triangle pattern. According to Technical Insight, our automated chart pattern recognition program, the measured price target after TEL broke out of its bottom triangle pattern is PHP 2,230.00 to PHP 2,296.00. As for fundamentals, data service revenues are expected to grow, supported by rising market share in the fixed line segment. Accumulating TEL once it breaks above PHP 1,990 is advisable. Set stop limit orders below PHP 1,840.00 to protect capital. Take profit at around PHP 2,250/PHP 2,300. For long-term investors, our target price for TEL is PHP 2,150.00.

RL Commercial REIT, Inc. (RCR) — BUY

Given the visible and resilient cash flows, steady growth, foreign buying due to the recent MSCI rebalancing announcement, and the stock’s 21.7% correction year-to-date, accumulating RCR shares once price breaks above PHP 7.50 is advisable. Set stop limit orders below PHP 7.00 to protect capital. Take profit at around PHP 8.20/PHP 8.50

LT Group, Inc. (LTG) — BUY

Despite flattish first quarter 2022 net income, sustained strong performance in the banking and spirits business, together with better prospects in the tobacco, beverage, and property segments should provide a lift for the company looking forward. While the share price is still bearish, any break out supported with strong volume may result in a bullish reversal. Accumulating LTG once it breaks above PHP 9.00 is advisable. Set cut loss below PHP 8.50. Take profit at around PHP 10.00/PHP 10.50.

PSEi TECHNICAL ANALYSIS 

Resistance: 6,800 / 7,200

Support: 6,400 / 6,180

The 6,800 level proved to be a key resistance level for the market. This suggests that once PSEi breaks 6,800 and stays above it, strong bullish momentum will ensue. Together with 6,800, the 100 and 200-day moving average prices are likely resistance levels which the PSEi must break to fully confirm the reversal to an uptrend.

TRADING PLAN 

Continue setting stop limit orders, especially below 6,400 to protect capital. Support levels are currently at 6,400/6,180. Accumulate more once PSEi breaks above 6,800 and 7,200.

KEY DATA RELEASES 

Tuesday, June 7, 2022

• Philippine CPI year-on-year for May 2022 (consensus estimate: 5.4%; 4.9% in April 2022);

Thursday, June 9, 2022

• Philippine exports for April 2022 on Thursday, June 9, 2022 (consensus estimate: 10.6%; 5.9% in March 2022);
• Philippine imports for April 2022 on Thursday, June 9, 2022 (consensus estimate: 26.8%; 27.7% in March 2022);

Friday, June 10, 2022

• Philippine unemployment rate for April 2022 (5.8% in March 2022);
• US CPI YoY for May 2022 (consensus estimate: 8.2%; 8.3% in April 2022).

In a nutshell, the Fed Put is about the US Federal Reserve stepping in to mitigate stock market declines by easing policy rates, i.e., cutting interest rates. 

Why would the US Fed do that?  

“In theory,” said Ruben Zamora, Head of Metrobank’s Institutional Investors Coverage Division, “since the stock market is forward-looking, current market prices reflect the future state of the largest companies in that market and in turn, offers a snapshot of the future health of the overall economy. So, there is a basis for adjusting monetary policy to preempt an economic slowdown.” 

With policy easing, banks can lend more, companies are encouraged to expand, and consumers are inclined to spend. All that can lead to economic growth, not to mention a more vibrant stock market. 

And yet, the Fed Put unintentionally creates a moral hazard for stock market participants, too. 

Moral hazard 

“It’s a moral hazard because the market is conditioned to think that, yeah, the Federal Reserve will always cut rates to support equity markets in cases of a sharp sell-off. It’s almost like having insurance. You start taking on more risk just because you know you’re covered,” said Zamora. 

This creates stock market bubbles as companies become overvalued when future cash flows are discounted using lower interest rates. 

Rising inflation has complicated matters, too. As the Russia-Ukraine war wreaks havoc on global food supplies and oil prices, inflation has relentlessly accelerated globally. 

Most central banks all over the world have been compelled to raise rates to help slow inflation. For its part, the US Fed has said it will be more aggressive in raising rates in 2022. 

Fate of the Fed Put 

For Zamora, there are two ways to look at the situation.  

“Is the Fed Put gone forever? Or is the US Fed just hitting the pause button on it? I think it’s more of a pause button, it’s probably not gone. The earnings or future cash flows of the largest companies in the US offer insight into future growth. If those cash flows shrink very quickly, the Fed is not going to ignore it,” said Zamora. 

“We’ll likely start seeing the effects of the Fed’s aggressive rate hikes soon, so it’s possible that by the time the FOMC (Federal Open Market Committee) meets in September, there might be enough data to give them reason to maybe ease off on hitting the brakes on the US economy, and perhaps move a bit more gradually in slowing it down,” he added. 

Implications for investors 

With the plunging US stock market and its effects on Asian stock markets, including the Philippines, investors must carefully consider what’s priced in in terms of the potential for future earnings growth and the intrinsic value of companies, according to Zamora. 

“I think right now markets are pricing in mid- to low teens earnings growth because margins are being squeezed by high inflation. Some good companies with resilient cash flows are getting cheaper, and for us, these companies are starting to look interesting, especially if our market continues to follow the overall weakness in global equities. We like these stocks because we believe long-term returns could be quite meaningful,” he said. 

It’s similar for bond investors. 

“We think long-term bond yields are starting to look attractive as well. You may want to consider adding long-term bonds and increase the average maturity of your investment portfolio. It’s too early to become aggressive on long-term bond positions, we do expect bond yields to continue rising driven by concerns over inflation and large domestic bond supply, but the value of a bond portfolio that’s skewed too heavily in favor of short-term bonds is at risk as the BSP continues to normalize overnight policy rates,” he said. 

As with every investment decision, a careful assessment of the risks is needed. 

_____  

ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.