Equities Outlook
Outlook. The Philippine stock market may see more downside with today’s drop ahead of the MSCI rebalancing implementation by month-end, weaker sentiment on the GDP growth disappoint, and negative surprises on corporate earnings news flow like the latest on PGOLD’s -5% earnings and Semirara Mining and Power’s 26% drop released this morning.
So far, earnings of the twenty PSEI companies that disclosed have lived up to the 10% we expected for the year and in the first half was actually above it at 11% despite the weak global and domestic growth backdrop, having accelerated 15% in the second quarter from the 8% in the first quarter (for the same 20 companies and 4.5% 1Q19 growth for the 30-member PSEi).
But market vulnerability will be offset by two factors: (1) hopes for further rate cuts as liquidity condition begins to be more closely watched since BSP Gov. Diokno gave fresh signals for more rate cuts and (2) from the earnings season, as more index heavyweights disclosing positive results.
Market Review. The PSE Index opened the week down by as much as 200pts last Monday and struggled to recover throughout the week, hovering between 7,700-7,900 level before closing at 7,854.4, down 3.4% week-on-week (w/w) on the back of Php3.9bn foreign selling. The result of MSCI rebalancing was released last week where analysts estimated close to US$108mn (Php5.6bn) of net outflows. Earnings also failed to inspire, led by index heavyweight ALI which saw net income growth of 12%, behind analysts’ estimate. JFC saw the biggest net foreign outflow (Php552mn) and fell 12.8% w/w after it reported disappointing 1H19 results and guided for continued headwinds brought by Smashburger in the short term and CBTL in the medium term. JGS fell by 9.3% due to recent downgrade from MSCI while MEG and its parent company AGI was sold on news that MEG’s perpetual securities worth US$200mn will be converted to 1.82bn shares, priced at Php5.7/sh.
Regional Markets. Geopolitical risk induced market volatility led to a sell down in global markets. Global growth slowdown takes center stage as Trump indicated he was not ready to make a deal with Beijing. Dow Jones Industrial index and the broader S&P500 fell 0.7% and 0.5% respectively. Shanghai composite index dropped 3.2% while ongoing protests in Hong Kong led to Hang Seng giving up year-to-date gains after falling by 3.6% last week.
Currencies. The Philippine peso fell 0.9% to Php51.9/USD, reacting to the 25bps cut and possibly more aggressive monetary easing moving forward as GDP slowed down in 2Q19. Also, increasing trade war tension also weakened demand for emerging markets, Philippines included. The Chinese Yuan fell 1.8% as a response to additional tariffs slapped by US.
Economic News
The week started with inflation cooling down to 2.4%, in line with analysts’ forecast, largely due to the slower increases in food prices thanks to the rice tariffication law, lower electricity rates, and lower pump prices, reflecting global oil trend. The good news was quickly tempered by below expectation GDP growth of 5.5%, lower than 5.9% forecast and 5.6% growth recorded in 1Q19, citing delayed passing of the 2019 budget. BSP responded to the slowdown with a 25bps rate cut and Governor Diokno further added, in a separate interview, that the BSP can supplement this further with another RRR cut as early as next month.
Corporate News
First semester earnings report continues. In the conglomerate sector, SM was ahead while SMC was behind. SM net income was Php23bn, up 27% year-on-year in 1H19, carried by its property and banking businesses. SM retail, meanwhile, was flat at Php5.7bn, dragged by PFRS16 adjustments implemented in 2Q19. Pre-PFRS net income, however, saw 10% growth in 1H19. SMC was dragged by PCOR and FB. PCOR domestic volumes were hit by excise taxes and extended maintenance of its refinery plant, with the latter dragging gross refining margins to USD2.3/bbl and resulting to net income to be down 72%. FB’s food segment suffered from cost and pricing pressures as well as oversupply of chicken leading to EBIT contraction of 77%. Beverages however remained solid led by San Miguel Beer Inc. and GSMI, posting 12% and 94% net income growth respectively.
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