BDO Securities cautiously optimistic amid virus risks

MANILA, Philippines — Despite the improved pace of vaccination for COVID-19, BDO Securities still sees risks that may derail the local stock market’s recovery.

BDO Securities said the entry of Delta variant in the country is a threat as the country is still far from achieving herd immunity this year.

COVID-19 mutations are becoming more infectious, transmissible, and even less reactive to current vaccines, it said.

BDO Securities said more outlook downgrades on the Philippine economy could weigh on the forward-looking stock market benchmark.  Fitch Ratings recently revised its outlook grade for the Philippines to “negative.”

“Though there are risks that could interfere in the recovery of the Philippine economy, investors may consider positioning on stocks that are pandemic-resilient.” said Bernhard Tsai, COO of BDO Securities Corp.

In BDO Securities’ 12-month forward base case scenario, the benchmark Philippine Stock Exchange index (PSEi) is seen to end at 6,800, based on 23.5 percent forecasted full-year earnings growth of index constituents this year.

However, should corporate earnings show better-than-expected results, bull case scenario target for the PSEi is at 7,400 which poses a potential upside of 10 percent  from current levels.

BDO Securities said the country’s largest conglomerates are heavily exposed in old-fashioned or traditional businesses such as banking and property sectors, which in turn are highly sensitive to the economic performance of the country.

“These top companies are cyclical sectors and the top weighted stocks in the PSEi that’s why when the Philippine economy was battered by the pandemic, stock prices of these companies also declined with their earnings and became 2020’s stock market laggards,” BDO Securities said.

BDO Securities, however,  sees these economy-sensitive companies rebounding  this year as historically, laggards from the previous year tend to outperform in the current year.

For recovery plays, BDO Securities said conglomerates have proven that despite the pandemic downfall, they are here to stay.

Banks’ earnings are expected to recover on the back of easing of provisioning costs, pick loan growth as business, and improving consumer confidence.

Among its top picks are BPI and Metrobank , which are trading at discounted valuations.

BDO Securities noted that the property sector’s resilient office rentals and improving residential segment are helping to offset the weakness in mall and hotel segments.

“As the economy continues to reopen, malls and hotels should contribute to the earnings growth of these companies.”

BDO Securities said Ayala Land and Megaworld both have a good portfolio mix of real estate segments and both are well-positioned to benefit from the improvement of the Philippine economy.

For the short term, BDO Securities advises investors to pick stocks that are defensive in the current environment -- fixed broadband (PLDT, Converge), essential retailers (Puregold, Robinsons Retail Holdings) and food manufacturers with exposure to improving business activity abroad (Universal Robina Corp., Century Pacific Foods).

“Investing in times of a pandemic may seem difficult but we highly suggest to always think long-term. Picking good quality stocks to invest in with a long-term timeframe in mind could save you from stress in the daily fluctuations of stock prices. Also, spreading your investment across different sectors could help in minimizing your investment risks,”  Tsai  said.

BDO Securities is a subsidiary of BDO Capital & Investment Corp., the investment banking arm of BDO Unibank.