Weekly Equities Summary and Outlook : October 1 – October 5, 2018

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Equities Outlook

Outlook. The PSEi may test the 7,000 support level amidst persistent negative sentiment arising from accelerating domestic inflation, sustained PHP weakness, rising interest rates and unabated net foreign outflows now on its 28th consecutive trading days. Key economic data to be released this week is the August’s balance of trade (Oct. 10) which is anticipated to hit a deficit of $3.6bn from $3.5bn in July to bring the year-to-date (YTD) deficit tally to $26.1bn.

Market Review. The PSEi fell for the third straight trading session yesterday to close at 7,050.8 (-0.4% from Friday’s closing). Last week, the local bellwether dropped 198.6 points (-2.7% week-on-week, w/w) to end the week at 7,078.2 following the release of September inflation print, which clocked in at 6.7% year-on-year (y/y) from 6.4% in the previous month, along with rising oil prices and worries of faster-than-expected Fed rate hike after the 10-year US treasury yield jumped to a seven-year high while strong US economic data fanned concerns of faster US inflation. YTD, the PSEi was the worst performing market, down 17.3%, as net foreign outflows accelerated to P2.7bn last week from P1.8bn in the previous week, resulting in YTD net selling of P87.5bn.

• Among the Asian markets the we follow, Japan (+4.5%) and India (+0.9%) were the only gainers, while the Philippines (-17.3%), China (-14.7%) and Hong Kong (-11.2%) were the top laggards.
• PHP tracked Asian currencies’ weakness last week, falling by 0.4% w/w to close on Friday at P54.24/$, as strong US jobs data and FOMC Powell’s hawkish statements boosted the USD. YTD, the PHP was the third weakest currency in Asia, down 8%, next to Indian rupee (-13.4%) and Indonesian rupiah (-10.6%).
• Last week, foreign investors bought GLO, MER, AC, TEL and AEV for a total of P438mn, while sold SMPH, BPI, SECB, ALI and JFC for a combined amount of P1.8bn.

Economic News

Philippine Statistical Authority (PSA) reported that September inflation rose to its fastest pace in more than nine years at 6.7% y/y from last month’s 6.4%, albeit a tad slower than consensus of 6.8% but within the BSP’s target range for the month of 6.3-7.1%. On a month-on-month (m/m) basis, headline inflation was steady at 0.9% (although slower at seasonally-adjusted at 0.8% from August’s 0.9%) as food prices continued its acceleration from previous month’s 8.2% to 9.7% due to elevated rice, fish and vegetable prices. Rice inflation, in particular, rose double-digit in September due to supply disruptions. On the other hand, core inflation, which excludes selected volatile food and energy items, eased to 4.7% from August’s 4.8%. YTD-September, headline inflation averaged 5% vs 4.8% from January-August, while core inflation was at 3.5% vs 3.7% from January-August. Bangko Sentral ng Pilipinas (BSP) expects inflation to settle at 5.2% in 2018 and 4.3% for 2019, before moving within its inflation target of 2-4% by 2020.

BSP disclosed that gross international reserves (GIR) sharply fell by $2.8bn from the previous month to end September at $75.2bn, its lowest level since July 2011. The m/m decline in foreign exchange reserves arose from the foreign exchange operations of the BSP, payments made by the National Government (NG) for its maturing foreign exchange obligations, and revaluation adjustments on the BSP’s gold holdings, which was partially offset by the NG’s net foreign currency deposits. The current GIR level is equivalent to 6.8 months’ worth of the country’s imports of goods and payments of services and primary income and 5.9x of the short-term external debt based on original maturity and 4.2x based on residual maturity.

Corporate News

Philippine Long Distance Telephone Co. (TEL) announced the signing of a deal with China’s Tencent Holdings and US private equity firm Kohlberg Kravis Roberts & Co. (KKR) to separately acquire up to $175mn worth of newly issued shares of its digital technology firm Voyager Innovations. The deal is expected to close in Q4 2018. The agreements also contain provisions that allow Voyager to issue additional shares to other investors which could bring TEL’s ownership in the company to below 50% (initial guidance of 40-45%), albeit it will remain its largest shareholder. TEL’s partnership with Tencent, the developer of super-app WeChat that has been credited as one of the apps that helped spark cashless revolution in China with its 1bn active subscribers worldwide, is seen to help accelerate the adoption of cashless/digital payments in the Philippines. This bode well with Voyager’s digital platforms that include PayMaya (a prepaid payment wallet), PayMaya Business (a digital payment option for retail), Smart Padala (a mobile based remittance network), and Lendr (a digital lending platform), among others. Meanwhile, KKR’s other technology investments include Go-Jek (Indonesia’s leading on-demand mobile platform for ride hailing, food delivery, and mobile payments), Suishou Technology (one of China’s largest personal finance management platforms) and First Data (global payment technology and services solutions provider with a presence in 118 countries). TEL closed yesterday at P1,415/share, down 4.4% YTD.

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