ONLINE stockbrokerage firm Colfinancial.com expects corporate earnings to drop by an average of 18.2 percent this year resulting from the measures taken to contain the coronavirus disease 2019 (COVID-19), a reversal from an earlier expectation of 12 percent earnings growth.
This translates to a 29.3- percent reduction in fair value estimates for listed companies, it said.
Given the various restrictions under the enhanced community quarantine (ECQ) which is implemented in the entire Luzon, the economy will be severely hurt especially since Luzon accounts for more than 70 percent of the country’s gross domestic product (GDP), Colfinancial.com said.
It noted while Visayas and Mindanao are not on lockdown, “various local governments in the two island groups, including Cebu and Davao, declared their own lockdowns.”
“Moreover, even after the ECQ is lifted, economic growth is expected to stay weak as people will most likely continue practicing social distancing measures to avoid getting COVID-19,” Colfinancial.com said.
“There will be other countries which will most likely still be under quarantine, negatively affecting our OFW (overseas Filipino worker) remittances, exports and tourism sectors. Consequently, various economists, including the government have reduced their 2020 GDP growth forecasts,” it added.
As a result, it said equity risk premiums have gone up as shown by the increasing spreads of bonds over US treasuries.
“For example, the yield on the Philippine 10-year dollar bond is now at around 4.02 percent from 2.45 percent during the start of the year, while the spread of Asian bonds over US treasuries has climbed to 6.80 percent from around 3.00 percent earlier this year,” Colfinancial.com said.
“As such, we increased our equity risk premium assumption by 350 basis points to 9.00 percent to reflect the heightened risk aversion,” it added.
Colfinancial.com however said even with the downgrade in earnings forecast, most stocks are still trading significantly below their fair value estimates.
“Median capital appreciation potential based on stocks’ current price and our new FV estimate is still 21.2 percent. However, stocks belonging to sectors that are resilient to the crisis have rallied significantly from their March lows and are no longer attractively valued (telcos, consumer staples, retailers of basic goods). Wait for pullbacks before buying the said stocks,” it said.