First Metro Securities turns bullish on stocks

First Metro Securities Brokerage Corp. of the Metrobank Group is bullish that the Philippine equities market next year is finally set to take off.

In a briefing at the start of the week for the Monday Circle Group at the Westin Manila, analysts of the FirstMetroSec, led by vice president Andro Beltran, project an improving growth outlook for next year “especially as the cycle transitions from the slowdown phase to early recovery.”

It was also their observation that “the Philippines is relatively less vulnerable to Trump 2.0 policies given our domestically-driven economy and ample reserves. More importantly, the Philippines is a key geopolitical ally in the Asia-Pacific region.”

As such, FirstMetroSec projects that “there is a path to double-digit earnings growth driven by the return of positive leverage, alongside potential AI-driven efficiency gains.”

However, they acknowledged  that they “see low valuations at the starting point,” but expressed the view that  “Trump 2.0 policies will continue to weigh on Philippine equity valuation in the near to medium term,” but with “a large degree of uncertainties surrounding such policies already priced in.”

They pointed out that “markets are fickle and will react swiftly to new data.” As such, they also project “a tight tug-of-war between the improving fundamental and the uncertainties surrounding possible Trump 2.0 policies which lay out a volatile price trajectory in the next 12 months.”

FirstMetroSec’s index target range and assumptions sets three scenarios.

Its bull case projection is for an end-2024 index at 8,600 with an EPS (earnings per share) estimate for 2025 of a positive growth of 13.3 percent. A base case scenario sees the index at the end of the year at 7,600 with the EPS posting a growth of nine percent and projecting an 11-percent growth in 2025. The bear case scenario projects a yearend index at 6,600 which would translate to a 2025 EPS of a much lower 6.4 percent.

Their bullish outlook for the Philippine economy next year is based on their observation of improving fundamentals that would mitigate noise from the second term of US President-elect Donald Trump.

The improving fundamentals are growth and inflation figures. Based on the latest GDP results, FirstMetroSec believes that “this phase of weak consumption growth appears to have bottomed out in the first half of 2024 and we believe it has started to recover.”

Furthermore, they said, “coupled with disinflation and monetary policy easing, the outlook for growth becomes clearer, setting the stage for a constructive macroeconomic environment next year.”

However,  DBS forecast growth and inflation for the Philippines for this year is GDP of six percent and inflation of three percent. For next year, a slightly lower 5.8 percent in 2025 and likewise an inflation slowing to 2.6 percent. The slowing trend continues for 2026 with a growth of 5.6 percent and inflation of 2.4 percent.

They stressed the need though for money supply to revert to double digit growth  from the current mid to high single digit level, and for excess liquidity to be channeled back into the economy.

They supported their positive observation of improving fundamentals on the “proliferation of green shoots” with key high-frequency data “continuing to improve as disinflation progresses and monetary policy eases.”

Additionally, they said, the midterm elections and favorable base effects would stimulate consumption. “We anticipate that the campaign period leading to the midterm elections in May 2025 will provide substantial tailwind to private consumption during the first half of 2025.”

As reference, they cited that “household spending underwent a trough during the first half of 2024, having grown by only 4.6 percent year on year during the said period.”

FirstMetroSec also believes that “friendshoring” benefits would remain in place despite changes in the US administration and policies. They foresee that in the next three to five years, more visible gains would come from the Luzon Economic Corridor, which is a trilateral commitment among the US, Japan and the Philippines, with Clark, Pampanga as the country’s next major economic cluster.

There are fears that with the second term of US President-elect Trump, his campaign promise to lower the corporate income tax rate to 20 percent or 15 percent from the current 21 percent, and an extension of Trump’s 2017 tax cut for individuals and businesses could make reshoring of operations to the US attractive, reducing the competitiveness of offshoring activities in the Philippines, which could lead to a decrease in foreign direct investments and employment from foreign companies in the country.

In addition, lower tax revenues in the US could create funding pressures for the US Federal government without additional revenue generation, which in turn could drive up US bond yields that are likely to attract foreign funds and strengthen the US dollar even more.

Fortunately, the FirstMetroSec analysts said, the Philippines still has a comparative advantage with the passage of the CREATE MORE which has reduced the corporate income tax rate for registered business enterprises to 20 percent from 25 percent.

On the risks from a possible upward adjustment on US tariffs as promised by Trump of anywhere from 10 to 20 percent, and a 60 percent duty on all US imports from China, the Philippines’ trade surplus to the US could be reduced, plus a slower global trade cycle could flow through our external trade balances especially since China is one of our top trade partners.

The Philippines, the FirstMetroSec analysts pointed out, is primarily a domestically-driven economy through household consumption. Likewise, the country is a net importer and is thus less vulnerable to the protectionist policies of our trade partners.

A downside they see from higher US bond yields and a weak peso is that these will exert pressure on equities valuation, which would support a cautious approach to positioning in Philippine equities. It was pointed out that foreign buyers have already exited the market, with one member of Monday Circle pointing out that the lack of foreign buyers in the Philippine equities market also stems from issues on governance.

FirstMetroSec cited the fact that “the Philippine equities market has seen cumulative outflows of $335 million so far this year, over 2.3 times higher than full year 2023,” with the primary drivers of the outflow due to “high risk-free yields in developed markets, novel and favored investment themes and a strong US dollar.”