Palace, economic team working on managing inflation, peso fall

From AB Capital's The Opening Bell: Three Moves

Event

The peso hit a fourth consecutive record low at P62.565/US$, with Malacañang attributing the weakness to broad US dollar strength and higher global oil prices. Government is signaling tighter fiscal discipline and better prioritization of spending, while the Bangko Sentral ng Pilipinas (BSP)'s recent rate hike and potential foreign exchange (FX) intervention provide the immediate policy response.

View

Negative for the broad market, but highly divergent at the stock level. Under our US$100/bbl oil / P62.52 FX scenario, earnings per share (EPS) sensitivity ranges from +25-31% for SCC and +21-25% for PCOR, to +3-6% ICT, versus -3-5% JFC, -10-15% SMPH, -10-14% ALI and -12-17% MEG/AGI. This is increasingly a stock-picker's rather than index market.

Catalyst

The key macro transmission remains oil ↑, peso ↓, inflation ↑, rates higher for longer. Fiscal discipline is supportive for sovereign credibility and the peso, but will not offset the external shock unless oil eases. The bigger risk is that prolonged P62-63 and high oil turn an FX problem into an earnings + valuation problem through higher input costs, weaker consumption and elevated discount rates.

Action

Lean toward energy beneficiaries, US dollar earners and defensives; reduce rate-sensitive property. Favor SCC/PCOR, ICT, CNPF and MWC. We would retain JFC as a core Outperform despite a 3-5% macro EPS headwind given pricing power and improving margins. Stay cautious on SMPH/ALI/MEG/AGI until oil retreats and/or the peso stabilizes.

Disclaimer: The information, analyses, and views contained herein is based on sources which we, AB Capital Securities, believe are reliable, but is not guaranteed by us and is not to be considered all inclusive. It is not to be construed as an offer or solicitation of an offer to sell or buy the securities herein mentioned. AB Capital Securities and its Directors and Officers and/or members of their families may have a position in the securities herein mentioned and may make purchases and/or sales of the securities from time to time in the open-market and otherwise.