STOCKBROKER Unicapital Securities Corp. sees the Bangko Sentral ng Pilipinas (BSP) cutting interest rates by 50 basis points (bps) for the whole of the second half of the year, lower than its previous expectation of 75 bps cut for the year.
With the BSP done with a 25 bps cut last week, another 25 bps is seen.
Unicapital Securities said this is more likely given the anticipated further drop in inflation the rest of the year attributed to the recent rice tariff reduction, and a rate cut in the US as well.
Rice tariff had been cut to 15 percent from 35 percent in July 5 and will be in effect until 2028, in response to the high cost of the Filipinos’ staple food.
“For perspective, rice accounts for about half of the Philippine headline inflation. In our view, a sustained deceleration of inflation and modest GDP (gross domestic product) growth should support our view of easing policy rates,” Unicapital Securities said.
“Overall, increased consumer spending due to lower interest rates should support our GDP forecast of 5.8 percent to 6 percent for 2024, near the low end of the government’s target of 6 percent to 7 percent,” it added, citing higher government infrastructure spending which is expected to account to 5 to 6 percent of GDP.
It said the US Fed is likely to cut its policy rates in the next meeting in September.
All these could help the Philippine Stock Exchange index (PSEi) to close the year at 7,000, with a price-to-earnings (P/E) ratio of 12.6x. Earnings per share (EPS) for the year is seen to average 11 percent.
Unicapital Securities said the PSEi is currently trading at an appealing valuation of just 11.0x.
“This is relatively cheaper compared to its peers, particularly the US with Dow Jones and S&P 500 trading at 20x and 22.5x, respectively,” it said.
“Looking ahead, with an expected EPS growth of 11 percent for 2024, our bottom-up analysis suggests a target of 7,000 for the PSEi in 2024, implying a forward P/E ratio of 12.6x. This is slightly lower than our previous target of 7,200 as we now expect lower reduction in policy rates by the BSP of 25-50 bps (from our previous estimate of 50-75 bps),” it added.
Unicapital Securities said its baseline target P/E is 1 standard deviation below the past five-year average of 16.6x.
“Our EPS growth forecast is derived from our earnings estimates for the index companies. In our view, the market will re-rate to 12.6x on a trailing basis from last year as we expect a reduction in cost of capital amid the anticipated decline in interest rates,” it said.
Unicapital Securities, however, said the growth could face headwinds should geopolitical tensions escalate and disrupt trade supply as well as the much-awaited rate cut in the US does not materialize, prolonging the elevated interest rate environment.
Sectors like property, consumer, banking, power and tourism and gaming are poised to benefit from the easing interest rate environment, it said.
This will result in a reduction in mortgage rates as well as make real estate investment trust appealing due to attractive valuations, it added.
The consumer sector should see positive effects from increased consumer confidence and lower inflation, Unicapital Securities said.
“For the banking sector, we anticipate accelerated loan growth and stable asset quality, making undervalued bank stocks an enticing opportunity. The power sector is expected to gain from reduced capital costs for expansion,” it said.
“Finally, the revival of travel to pre-pandemic levels should boost tourism and gaming industries,” it added.
