Weekly Equities Summary and Outlook : July 1 – July 5, 2019

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Equities Outlook

Outlook. This week, we expect the resistance of 8,100 to hold, meaning PSEi will again struggle to break above it as the market recently sold on news of the June inflation beat and ahead of Fed's Powell Congressional appearance amid the US markets' correction after hitting new all-time highs. US and Philippine second quarter earnings results are coming out in the next two to three weeks and guidance for the rest of the year will be closely watched.

Recent newsflow points to improving government spending, in line with market's expectation of a catch-up, positive for GDP growth and the market. The national government spent Php61.5bn in infrastructure and other capital expenditures in May, up 5.9%, following 56% contraction in April. Government spending has finally rebounded after delays brought by the budget impasse, good for the market but not enough to make a breakthrough past PSEi's 2019 high in February. Fed's rate-cut inspired rally last week was met by a stronger-than-expected jobs report over the weekend, add of 224,000 jobs in June, above the first five months’ average of 161,800 for 2019. This reversed the market's initial 50bps cut in policy rate cut by month-end and three rate cuts for 2019 to a less dovish cut of just 25bps this July instead.

Market Review. The PSEi ended 30 points shy of its 2019’s high of 8,147, closing at 8,117.9, up 1.5% for the week on thin average daily volume of Php5.9bn versus year-to-date average of Php7.8bn. Local buyers, inspired by the June inflation beat of 2.7% (vs forecast of 2.8%), absorbed foreigners’ net selling of Php357million. Top index names which saw the biggest foreign selling were SMPH, BLOOM and BPI, which saw net foreign outflows of Php600mn, combined.

Regional Markets. The Dow Jones and S&P500 reached all-time highs last week ahead of the Fed cut this month as economic data remained subdued. Another US job measure is the more subdued US private payrolls (seen as a preview of the more detailed and comprehensive government data release) of 102,000 in June, missing analysts’ estimates of 135,000, and in turn, increased the likelihood of monetary intervention from the Fed. New jobs report, however, pointed to stronger economy which led to profit taking by the end of the week.

Currencies. Better-than-expected inflation helped the peso buck the regional trend and end the week with 10bps (~5c) gain. The inflation beat was key, validated by softer global oil and domestic palay prices, the latter on the back of tariffication. This plus the factor of high base effect from last year all suggest a potential below 2% inflation in the second half.

Economic News

International reserves rose slightly by US$20million to US$85.38bn in June, another factor behind the peso strength. BSP cited revaluation gains from its gold reserves, increased NG net foreign deposits, BSP foreign exchange operations, and income from its investments abroad behind the higher GIR. Import cover remained stable at 7.4 months’ worth. On the other hand, loan growth slowed to 11.9% in May coming from 12.7% in April. Also, M3 growth moderated a bit to 6.4% in May from 7% in April.

Corporate News

URC sold 40% of its stake in its Australia and New Zealand business to Europe-based Intersnack Group, paid for by a mix of cash and shares of Yarra Valley Snack Foods Pty, Ltd., Intersnack’s unit in Australia.

The full amount has yet to be disclosed, pending approval from the Australian Foreign Investment Review Board and New Zealand Overseas Investment Office which URC estimates will conclude in 3-4 months. Mislatel consortium was awarded license to operate, posting a Php25.7bn performance bond and congressional approval of its franchise. All eyes are now on targets set by government which include CAPEx spend of Php150bn, deliver average broadband speed of 27Mbps, and population coverage of 37%. In perspective, average CAPEx spend of the incumbents this year is only Php70bn while average speed tops 12Mbps. Read full article here.