Local stocks ended 2017 with a bang, gaining a total of 25.1 percent for the year and posting a record finish on the final trading session as investors bet on another bullish year ahead.

The Philippine Stock Exchange index (PSEi) added 23.33 points or 0.27 percent to close on Friday at 8,558.42, its best-ever finish. A new intra-day peak of 8,640.04 was likewise hit during the day.

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The year 2017 was a breakout year for local stocks, thanks to a much-awaited tax reform program seen to fund the government’s promise of a “golden age of infrastructure” alongside a generally favorable global environment that buoyed fund flows to emerging markets.

After attempting to decisively conquer the 8,000 barrier for the last three years, the Philippine Stock Exchange index (PSEi) finally succeeded in 2017. The main index closed at new highs 14 times during the year, ending at a new record during the final trading session on Dec. 29.

This yearend performance reversed the slump seen in the last two years. The PSEi fell by 1.6 percent in 2016 and lost 3.85 percent in 2015.

Most trading participants are just as bullish for local equities in the new year, with top analysts projecting that the PSEi would continue to scale new heights beyond 9,000.

Philippines equities are “looking good in 2018,” wrote analyst Alfred Dy, head of research at CLSA Philippines in his yearend note. CLSA raised its PSEi forecast to 9,100 from 8,800 by the fourth quarter of 2018.

Average earnings for 34 stocks in CLSA’s official coverage grew by 5.2 percent year-on-year in the first nine months of 2017 and were in line with the house view on earnings growth.

“Unlike in the 1990s up to the early 2000s when foreign investors reigned supreme, market turnover is now equally split between foreign and domestic investors. This phenomenon is happening given rising income levels, falling interest rates and rising AUMs (assets under management) of local fund managers,” Dy said.

Stockbrokerage BDO Nomura also expects the PSEi to surge to a new high of 9,100 this new year on expectations of faster corporate earnings growth.

Despite rising inflation and interest rates, BDO Nomura Securities research head Dante Tinga Jr. said the outlook for the stock market was still bullish as index-weighted core earnings per share in the Philippines would likely surge to 13.9 percent in 2018 from just 5.3 percent in 2017.

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Strong economy

BDO Nomura expects the Philippine infrastructure story to continue amid a still “pretty solid” growth trajectory and supportive external backdrop. It sees Philippine gross domestic product (GDP) expanding by 6.9 percent in 2018, upgrading its forecast from 6.8 percent earlier. In 2017, growth was seen to average at 6.7 percent for the full year.

British banking giant HSBC, for its part, sees the Philippines remaining one of Asia’s fastest-growing economies in the next two years on strong momentum from consumer and investment spending alongside the reversal of historical government underspending.

For 2018, HSBC upgraded its Philippine GDP growth forecast to 6.7 percent from 6.5 percent while it expects growth in 2019 to remain robust at 6.8 percent. HSBC’s growth forecasts for 2017 and 2018 are above the market consensus growth outlook of 6.6 percent and 6.4 percent, respectively, for these years.

Based on HSBC’s regional outlook, the Philippines will be Southeast Asia’s growth leader next year, followed by Vietnam (6.5 percent) and Indonesia (5.2 percent). Malaysia, Thailand and Singapore are expected to grow by 5.1 percent, 3.7 percent and 2.7 percent, respectively, in 2018.

Across Asia, the Philippines is expected to grow as fast as China next year, likely to be outpaced only by South Asian economies India (7 percent) and Bangladesh (7.2 percent).

In a research note to clients, HSBC economist Noelan Arbis noted that the Philippines’ impressive 6.9-percent year-on-year growth in the third quarter suggested that the country was “firing on all cylinders, with all expenditure components contributing positively for the first time since 2014.”

This growth dynamic is expected to continue in the coming years.

Higher contribution from government spending is an important development because “if this persists, it could suggest that the government is finally curbing its historical pattern of underspending,” the economist said.

CLSA’s Dy said that given the increasing participation of domestic investors in the stock market, the AUM levels of Philippine fund managers have breached P3 trillion coming from just around P768 billion in 2004, translating to a nearly quadrupling of assets under management in the last 14 years.

“The country’s debt-to-GDP ratio is now at 41.4 percent compared to 75 percent in 2004. The banking sector’s loan-to-deposit ratio (LDR) is now at 71 percent coming from 95 percent in 1997. Clearly, the economy is not yet overheating,” Dy added.

Growth also outperformed expectations in 2017 even when a band of Islamic extremists affiliated with the ISIS terrorist group wreaked havoc for five months starting May 23 in Marawi, the capital city of Lanao del Sur in Mindanao. After the military liberated Marawi from terrorists, reconstruction efforts in the coming months are seen to perk up the economy of the whole of Mindanao.

Key risks

For the market to continue its ascent beyond the legislation of the Tax Reform for Acceleration and Inclusion (Train), Dy said the market would want to see see some real physical progress on the infrastructure front.

Train, recently signed into law by President Duterte, is the first package of a comprehensive tax reform program. The package lowers and simplifies personal income taxes as well as the estate and donor’s taxes, expands the value-added tax (VAT) base, adjusts oil and automobile excise taxes and introduces excise tax on sugar-sweetened beverages.

“A low inflation and interest rate environment are also pluses for the stock market,” Dy said. “If inflation remains well within the 2-4 percent recommended range of the central bank, there is even a chance of monetary loosening via cuts in reserve requirement.”

BDO Nomura expects investors to pay 19.6 times the kind of money they expect to make in 2018 compared to a price-to-earnings (P/E) ratio of 20.5 times in 2017. Equities are seen to trade at a premium but still below the peak P/E ratio of 19 to 20 times.

Upside risks are seen to come from the execution of infrastructure-building and the tax reform package.

On downside risks, Nomura’s Tinga said it was inflation—not current account or fiscal deficits—that was likely to be the biggest concern from an equities and stock-picking point of view.

Other risks are seen to come from the slowdown in the business process outsourcing (BPO) sector, a key economic driver in recent years, alongside possible delays, dilution and reversal of reforms under the Duterte administration.

Nomura senior economist for Southeast Asia Euben Paracuelles said Philippine inflation might rise in 2018 to 4.3 percent from 3.2 percent in 2017. This will be higher than market consensus and exceeds the central bank’s 2-4 percent target range, attributed to the pickup in oil prices and pressures for an economy that was rising faster than its potential. The economist said this would likely prompt the Bangko Sentral ng Pilipinas to jack up interest rates by a total of 100 basis points or about 25 basis points every quarter this 2018.

The global environment is seen to remain favorable for emerging markets like the Philippines this 2018, Paracuelles said. However, the economist noted some external risks from the slowing growth in China and rising trade protectionism in some parts of the world. On the other hand, geopolitical risks that grabbed headlines in 2017—such as rising tension between the US and North Korea—are not seen to escalate this 2018.

Meanwhile, stock traders will have to live with a 20-percent increase in the stock transaction tax (STT) included in the recent Philippine tax legislation. The increase in the STT from 0.5 percent to 0.6 percent was among the “offsetting” measures inserted in the Train. This raises friction cost in the stock market, which already imposes the highest tax burden in the region.

PSE president Ramon Monzon had said that it was puzzling enough that while the main-share PSEi had hit new highs many times this year, value turnover at the stock market was just the same, if not less than, the volume for 2016.

“Obviously, we need to do a lot of work to increase the volume or the interest in our stock market,” Monzon said.

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