WHILE admitting share prices are expected to generally rise in the next six months on the Bangko Sentral ng Pilipinas’ (BSP) plan to cut rate, online stockbroker Colfinancial.com cautioned investors of the possible “volatility risk” stocks could face.
April Lee-Tan, Colfinancial.com chief equity strategist, said volatility could arise from the lag between the rate cut and its eventual impact on the economy.
At the stockbroker’s investor briefing on the market outlook in the next six months over the weekend, Tan said the BSP is likely to cut in its August meeting, anticipating the US Federal Reserve will also have its first rate cut by September.
“The consensus is two rate cuts, so 50 basis points. In other words,(BSP) will just follow the lead of the Fed – the Fed is also expected to cut rates by a total of 50 basis points this year. So probably this year, we’ll see a 50 basis-point rate cut,” Tan said.
“(But) rate cuts aren’t automatically good for the market. The relationship is there. But if you look at actual performance, it’s not straightforward, because other factors could impact profitability over the next six to 12 months. The rate cuts take time to work through the economy. There are lags,” Tan added.
This is particularly notable in the BSP’s latest consumer and business surveys.
“Consumer confidence is quite weak. And the things that consumers talk about why they’re not so confident is the high prices of goods. Because of the high prices of rice, food and oil, they feel like they don’t have enough money to buy other things because a big chunk of their salary is now devoted to paying for food and rice,” Tan said.
Tan also noted consumer spending growth in the first quarter of the year was below 5 percent, which is “really very weak” compared to the 5 to 6 percent average consumer spending growth before the COVID-19 pandemic.
“The same goes for business confidence. Businesses are concerned about weaker demand for goods and services, worried about inflation and the impact on the demand on goods and services. Like what came about in the survey, (businesses) are also worried about geopolitical tensions and potentially how it could impact oil prices,” Tan added.
Tan said these could have a negative impact on business profitability.
“If you’re a business owner, and you have this poor confidence, I don’t think you’ll pursue your capital expenditure plans, not just because the banks have cut interest rates. You’re probably going to wait until you feel that demand is increasing,” she said.
Tan, however, said investors should stay in the stock market.
“In general… valuations of the stock market, they’re really so cheap. Time is going to be your friend because accumulating these stocks at very cheap prices will actually be beneficial over the long term when you go back to mean reversion – meaning stocks will (revert) back to historical average valuations, which is 16x PE – we’re currently doing 10x,” Tan said.
