Tax reform fuels bullish sentiment

January 2, 2018 - 3:17 PM
Jubilant mood on the last trading day for 2017 at the PSE. PHOTO BY KJ ROSALES, PHIL. STAR

MANILA – Spirits are high following Philippine stocks’ stellar run in 2017, with the tax reform program and sustained strong economic momentum stoking bullish sentiment for the new year.

The Philippine Stock Exchange index (PSEi) — a barometer of investor confidence — ended 2017 at a record-high 8,558.42, rebounding from a two-year slump that had raised doubts that the bull run had lost steam.

The benchmark index delivered a full-year gain of 25.11%, thanks to the return of foreign investors to the local equities market.

Net foreign purchases reached roughly P55 billion last year compared to P2.8 billion at the close of 2016, PSE Chief Operating Officer Roel A. Refran said in a phone interview.

Bulls showed up big time last year, capping the year with a late surge fuelled by the optimism on the passage of the tax reform law that will help fund President Rodrigo R. Duterte’s P8.44-trillion infrastructure program.

“Ultimately, (local stocks) grow with the economy. We grow with Philippines, Inc. The infrastructure story definitely has an impact on how we will be viewed by certain investors,” Mr. Refran said.

The tax reform program hopes to increase take-home pay for most wage earners, compensating for the lost revenue together with excise taxes on fuel, cars and sugar-sweetened beverages, among others.

For those who missed out on last year’s gains, most market analysts are anticipating the rally could have another leg up, as the economy feels the impact of the tax program.

ATR Asset Management, Inc. (ATRAM) sees a base case scenario of 9,600 and a best case of 10,800 for the bellwether index, anchored on the impact of the tax reform program and 10-12% growth in corporate earnings.

“The Philippines is (undergoing a) structural change. We are seeing (a) structural improvement in the economy and expect that to generate a strong multiplier effect across sectors as jobs are created (and) incomes grow up,” Julian P. Tarrobago, Jr., head of equities at ATRAM, said in a recent interview.

COL Financial Group, Inc., sees upside potential for the PSEi, with a base case forecast of 9,300.

“We still see some capital appreciation. Growth is intact and we are positive because of the tax reform (program),” COL Financial Head of Research April Lynn L. Tan said in a phone interview.

PCCI Securities Brokers Corp. chose to be more conservative, with its research head, Joseph James F. Lago, saying in an e-mailed response to a request for comment: “Potential upside of the PSEi is at least 8,800 should the current record high… be surpassed. The support levels of expected corrections along the way are seen at 8,100 and 8,000.”

Philstocks Financial, Inc. Senior Analyst Justino B. Calaycay, Jr. is projecting PSEi at 10,000-11,000 in 2018 provided the country contains political noise and international geopolitical risks remain manageable.

“The market may be able to sustain its optimism going into 2018 on the back of expectations the TRAIN (Tax Reform for Acceleration and Inclusion) will be a boost. The year’s growth narrative is seen to focus on public and private infra[structure] spend[ing] as the former (public sector) ramps up its ‘Build, Build, Build’ push and the latter (private sector) enjoys the perks of more spending cash in light of the higher income tax threshold,” Mr. Calaycay said in an e-mail, even as he cautioned that tax reform could raise the prices of some basic goods.

To be sure, not everyone is aboard the tax reform train.

Abacus Securities, Inc. has a muted view for local stocks because the higher excise taxes that come with the new law could hurt household spending, which accounts for more than two-thirds of the economy.

“You’re putting P100 into people’s pockets but then you’re going to take out P200-250 in the other pocket. For me personally, it is less of tax reform than actually a tax hike,” Abacus Securities Head of Research Raymond S. Franco explained in an interview.

“You’re trying to justify higher revenues to finance infrastructure and expand the capacity of the economy, which is very good intention indeed but I think we should be more realistic that not all of these projects can be rolled out in the next five years.”

Mr. Franco is “not looking for much movement” in the PSEi this year even though a break of the 9,000 level is possible.

“Hope is pushing up the market and if the government doesn’t deliver, you’re probably going to see a de-rating for the market,” he said. — with Arra B. Francia