Companies that track the momentum of the economy lead the stock market’s uptick as restrictions on people’s movements ease, stockbrokerage firm Colfinancial.com said.
Commonly dubbed as cyclical stocks, these stocks have led the month-on-month uptick of the PSE in October, Colfinancial said.
The Philippine Stock Exchange index (PSEi) closed September at 6,952.88 and jumped 1.46 percent to close at 7054.70 in October.
Colfinancial said the PSEi performed strongly in October as the number of daily new coronavirus disease 2019 (COVID-19) cases began trending lower.
“This was led by cyclical stocks while defensive stocks that performed strongly during the early part of the year lagged behind,” it said.
Cyclical companies primarily anchor its prospects on the general health of the economy – businesses expand when the economy expands and slows down when the economy slows or contracts. In the present economic crisis brought by the pandemic, businesses in the retail, property sector, and even banks were among the sectors that experienced a slow down due to the tough economic environment that took a toll on people and even the government’s capacity to spend.
This contrasts with defensive stocks whose businesses continue to enjoy good business amid a challenging environment like utility companies and bare necessity businesses like agriculture and food manufacturing which produce products and services that people will continue to consume even when conditions are bad.
Colfinancial said the “outpeformance” of cyclical stocks is due to the expectation that they will benefit the most from the reopening of the economy.
“Note that the pandemic hurt cyclical companies such as mall operators, hotels, restaurants and retailers of non- essential goods the most, as they were forced to shut down or operate at limited capacity to control the spread of COVID-19 infections,” it said.
“Meanwhile, banks suffered from higher non-performing loans as many of their borrowers’ finances deteriorated, negatively affecting their ability to pay debts. Demand for loans also weakened as most companies put their expansion plans on hold, diminishing the need to borrow funds,” Colfinancial added.
The online stockbroker said with growing likelihood the economy would reopen at a more sustainable basis due to the falling number of daily new cases, rising vaccination rate in the National Capital Region and the country, and the availability of a medicine to treat the virus soon, “cyclical companies would benefit the most in terms of earnings recovery.”
Colfinancial also noted since the pandemic started, most cyclical companies were trading at depressed valuations.
“Many property companies are still trading below their book values, implying that the stock market is valuing their assets at a significant discount to their historical acquisition cost, even though property prices have remained steady despite the pandemic,” it said.
“Several banks are also trading below their book values, even though banks today are highly capitalized and very liquid. Provisions against bad debts are also more than 100 percent for some banks making them less vulnerable to write-offs,” it added.
Colfinancial said that despite the strong performance of cyclical companies recently, “there is still room for prices to go up as valuations remain depressed.”
Most cyclical companies are still trading below their 10-year historical average price to earnings ratio, Colfinancial noted.
