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Recommendation
Our PSEi target range for the year 2023 is 5,900 to 7,400 – with 6,700 points as our end-2023 base case target. Our bull case index target is 7,400 points while our bear case index target is 5,900.
While our base case target for end-2023 has limited upside from where we are currently trading, the path will be volatile.
In the next 12 months, we see a story of two halves to bring trading opportunities to the table. For the first half of next year, we prefer to tactically take a risk-on view of a U.S. Fed pivot/pause leading to bear market rallies and presenting opportunities to take profit.
But towards the second half, we prefer to lighten positions on Philippine equities as the market discounts the lagged impact of policy tightening by the central banks on the economy and earnings.
| PSEi end-2023 target | U.S. 10-year bond yield expectation | |
| Bull case (Optimistic case) | 7,400 | 4.00% |
| Base case (Neutral case) | 6,700 | 3.60% |
| Bear case (Pessimistic case) | 5,900 | 4.40% |
How to position in 2023?
We share below our key themes and associated stock picks for 2023.
Key Themes and Stock Picks for 2023
| Current Price | Target Price | Potential 1-Year Return | |
| Theme 1: Upgrade to access full report | |||
| Stock 1 | [For Premium | Access members only] | 22.9% |
| Stock 2 | – | – | 26.7% |
| Stock 3 | – | – | 9.5% |
| Theme 2: Upgrade to access full report | |||
| Stock 4 | [For Premium | Access members only] | 14.4% |
| Stock 5 | – | – | 29.7% |
| Stock 6 | – | – | 4.8% |
| Theme 3: Upgrade to access full report | |||
| Stock 7 | [For Premium | Access members only] | 57.4% |
| Stock 8 | – | – | 21.2% |
Theme 1 – [Upgrade to access full report]
Ahead of an expected cyclical downturn, we prefer stocks with defensive revenue streams, such as those in staple categories and which serve essential goods and services.
Under this theme, we like the following stocks:
- Stock 1 – Upgrade to access full report
- Stock 2 – Upgrade to access full report
- Stock 3 – Upgrade to access full report
Theme 2 – [Upgrade to access full report]
Along with a Fed pivot/pause, we expect bond yields to peak, if not decline, as the late cycle ends. Hence, we believe that the next 12 months will present opportunities to enter the Philippine REITs sector.
Under this theme, we like the following stocks:
- Stock 4 – Upgrade to access full report
- Stock 5 – Upgrade to access full report
- Stock 6 – Upgrade to access full report
Theme 3 – [Upgrade to access full report]
We prefer undervalued index names whose current valuations leave sufficient downside protection in the event of any such multiple de-rating owing to potential outflows.
Under this theme, we like the following stocks:
- Stock 7 – Upgrade to access full report
- Stock 8 – Upgrade to access full report
Key Risks
Inflation is still a top-of-mind concern
Inflation, as we feared, has broadened to reflect structural changes in demand and supply conditions. Going into 2023, our main concern is that inflation could stay elevated for longer – especially with the recently implemented minimum wage increase and planned tax cuts (beginning Jan 2023) likely fanning demand-side pressures and extending the late stage of the current economic cycle. This will, in turn, warrant further upside risk to policy rates in order to bring inflation within a target range. In the case of a prolonged period of elevated inflation and restrictive policy environment, the economy risks sustaining structural damages – in both consumers and businesses – that may take a longer time to heal and recover.
Sustained rise in yields…
Our base case assumption is that the Fed will continue to raise policy rates well into the first half of 2023, and keep them elevated. Our DBS economist forecasts Fed and BSP policy rates to end 2023 at 5.0% and 6.0%, respectively. We think levels higher than these will warrant another round of market valuation de-rating and EPS cuts. This is especially given that current trading valuations are demanding vis-à-vis local bond yields, in our view.
…and end of easy money
With the end of easy money and given the now attractive bond yields in developed markets, we could see foreign investors take advantage of bear market rallies as an opportunity to exit Philippine equities and shift allocation to bonds. Hence, we prefer to see benchmark rates to go down before we see any sustainable rally in the next 12 months.
Fed policy error
Based on our DBS economist, the Fed could make a policy error in either direction – overtightening or premature easing. In the case of the former, substantially positive real rates would most likely translate into a major drag to credit growth and consumption. It may also lead to debt distress and a pronounced slowdown in investment. As for premature easing, the Fed’s track record of being market friendly and cutting readily to counter financial market distress (seen most recently in 2019) could prevail and result in the Fed to change track and cut expeditiously, which may ease the economic slowdown and support markets, but cause inflation to remain sticky.
Stronger US dollar and weaker Peso
On one hand, a continued strength of the US dollar will further justify a light positioning on EM equities. Historically, we have observed that the EM currency basket has a high correlation (+77.7%) on foreign fund flows into the Philippine equities market. On the other, notwithstanding benefits to exporting sectors and overseas Filipino workers (OFWs), we are of the view that a fundamental weakness of the Peso has net disadvantages to the economy and corporates especially given that the Philippines is a net importing country. A weaker Peso will generally result in imported inflation as well as higher cost of capital for corporates that require dollars to conduct their business, putting pressure on earnings and valuations.
Capacity for fiscal stimulus may be limited, in case of another risk event
We highlight that the principal damage of COVID-19 has been less on consumer and corporate balance sheets, but more on fiscal conditions. This is given that the unprecedented scale and pace of rescue packages, while necessary to cushion the expected economic and corporate earnings fallout, came at the cost of the government’s future spending and investments capacity. Furthermore, should there be another risk event to clear the decks, we are concerned that the government’s coffers may not have ample fiscal space to cushion the fallout and/or boost economic recovery.
Geopolitical conflicts in Europe and Asia
Uncertain outcome of geopolitical conflicts (e.g. Ukraine and Russia as well as China and Taiwan) present negative externalities that could impact economic and financial markets’ performance.
COVID-19 continues to remain a risk globally
The threat of continued COVID-19 cases could slow the reopening of economies, especially China. Some countries are still impeded by stringent mobility curbs that continue to disrupt global supply and value chains.
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