Outlook. A healthy pullback this week is in the cards after the PSEi knocked on the lower end of the band of our 2019 index target of 8,400 – 8,800. This is the natural course after a big rally of 222 points in two days, similar to what were seen early in the year, when the PSEi rose by 217 points and in November last year which saw it climb by 248 points.
Four factors were behind the PSEi rally: (1) BSP’s announcement that rate cuts are certain and it’s only the timing that’s the question. (2) A 25 bps cut by month end is also a certainty based on the more dovish Fed language given to the US Congress. (3) Second quarter corporate earnings season has begun, delivering the first encouraging result; solid numbers from index heavyweight SMPH. (4) Lastly, China’s second quarter GDP growth beat of 6.3% versus 6.2% expected, showing resilience and lifting the economic growth overhang of the trade war on Asian markets last week. The People’s Bank of China (PBOC) reiterated it stands ready to support the economy, addressing the concerns about a prolonged slowdown.
Amidst the profit-taking among large and mid-caps that have touched their 52-week highs, we expect previous resistance levels to turn into strong support, specifically 8,100. The pullback is a buying opportunity to overweight fundamentally sound stocks that should eventually show results that meet or even beat analysts’ estimates as the economy rebounds from the doldrums of the first quarter.
Market Review. The PSEi broke past its 2019 high, hitting intra-day high of 8,197.5 last Friday before closing at 8,141.8. FGEN continued to post new 52-week high at Php27.5/sh as the market expects good 1H19 earnings result, thanks to persistently high WESM prices. Property names ALI, RLC, and MEG also rallied to its 52-week highs, at Php53.0, Php27.5, and Php6.3 as expectation of more accommodative monetary policy bodes well for property sector. It also helped that POGO sector welcomed DoF’s policy on implementing new taxes particularly for POGO employees. Lastly, URC’s divestment in its Australia-NZ business helped push URC to Php179/sh, a level the market hasn’t seen since 2017. BDO also hit 52-week high, closing at Php148.2.
Regional Markets. Fed Chairman Powell’s testimony in the US Congress strengthened the case of policy easing as early as this month. Dow Jones reached 27,332, up 1.5% week-on-week (w/w) while S&P500 was up 0.8% to 3,013.8. The Fed repeatedly highlighted the risk of possible global economic slowdown by 2020, which will require timely intervention from the Fed. Chinese markets were down on the expectation of lower GDP growth to 6.2% from 6.4% in 1Q19. Hang Seng was down 1.1% while Shanghai Composite fell 2.7%.
Currencies. The peso strengthened by 0.1% to Php51.14/USD due mainly to weaker dollar. The dollar index fell by 0.48% for the week, following expectation of an interest rate cut this month. Also, Philippine trade deficit narrowed due to weaker imports in May, easing downward pressure on the peso.
Philippine trade deficit narrowed by 16% for the month of May as imports contracted for the second consecutive month, down 5.4% to US$9.4bn, while exports eked 1% gain to US$6.1bn. Year-to-date trade deficit was still up 5.3% to US$16.5, but we highlight that this was a huge slowdown from the 54% growth recorded in the same period last year.
Tourist arrivals grew 15.6% in May, according to Department of Tourism. Year-to-date, tourist arrival was up by almost 10% to 3.5million, keeping the full year target of 8.2million within reach. Majority of foreign visitors came from South Korea which comprised 22.6% of total arrivals. Chinese tourists followed, with 733,769 arrivals, comprising 21% of the total.
Meanwhile, foreign direct investment (FDI) fell 14% in the first four months of the year to US$2.9bn as equity investment was down 54%. Investments in debt instruments grew 16% to US$2.2bn.
SMPH kicked off the 1st half (1H19) earnings season with a 16% net income growth to Php19.3bn for the period, in line with analysts’ forecast. Net income was driven by robust topline growth particularly with its residential business which posted 26% growth in revenues to Php21.4 and sustaining 20% presales growth of Php41.4bn. Mall revenue grew 8%, on the back of 7% same mall sales growth. Other businesses namely commercial properties and hotels and convention centers saw 13% topline growth and 18% operating income as margins improved to 51% from 48%.
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