“Although the US and other developed economies are at risk of entering a recession, the Philippines is less vulnerable since it is a domestically driven economy, with more than 70 percent of GDP coming from local consumption,” COL chief equity strategist April Tan said in a research note furnished to their investors.
Year to date, the Philippine stock market has performed poorly, with the Philippine Stock Exchange index (PSEi) falling by 1.8 percent during the first six months of 2023.
“We believe that the Philippine stock market is already in the late stages of the bear cycle as evidenced by the very cheap valuations of stocks, low foreign investor participation, and shrinking average daily value turnover,” Tan further noted.
Considering these factors, COL said the market’s upside potential is much higher compared to the downside risk.
However, investors need to be patient since it is not yet clear when the stock market will turn around, COL analysts further said.
To manage risks, COL reiterated its recommendation to investors to stay away from expensive stocks, and to focus on larger capitalized stocks that provide cash dividends as larger capitalized stocks usually lead the market higher during a recovery, while cash dividends make it easier for investors to be patient.
On Monday, June 26, the PSEi closed the trading day up 129.54 points or 2.03 percent to 6,523.09.
Less vulnerable
Despite the fears of a global recession, COL analysts believe the Philippines is less vulnerable because it’s a generally domestic consumption-driven economy. Domestic banks and local borrowers are also less vulnerable to rising interest rates.
According to COL research, about 78 percent of bank deposits are current account and savings account deposits. This makes local banks less sensitive to the impact of rising rates on liquidity and funding costs.
Moreover, local banks are very well capitalized. Even if they suffer from mark to market losses on their held to maturity bonds, their capital adequacy ratios are still expected to be higher than the Bangko Sentral ng Pilipinas’ minimum requirement. “Finally, the impact of the BSP’s 425 basis points rate hike since 2022 is not as significant on local companies (compared to that of the Fed’s 500 basis points rate hike from 0.25 percent) since local lending rates are coming from a higher base and since it is generally difficult to access credit in the country,” COL said.
Inflation also continued to fall to only 6.1 percent in May from a peak of 8.7 percent in January and 6.6 percent in April. Because of this, the BSP refrained from raising rates during its last meeting, and is set to cut banks’ reserve requirements on June 30. (CSL)