Philippine Markets Newsletter

MONDAY MACRO: How to not let potential pandemic headwinds spoil the holidays

December 6, 2021

The rise of a new COVID variant has caused a panic among investors both locally and globally.

That said, it’s likely not yet a reason to be bearish on the PSEi. As the Q3 2021 results and Uniform profitability shows, the index overall still seems poised for growth this quarter.

Philippine Markets Newsletter:
The Monday Macro Report
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Like other equity markets around the world, the Philippine stock market saw a decline last week. The Philippine Stock Exchange index (PSEi) fell below 7,000 for the first time since early October.

Many have attributed the index’s decline to the threat of the Omicron COVID variant. While the exact nature of the variant is still unclear, it has caused governments around the world to preemptively tighten travel restrictions.

In the Philippines, the government added seven countries last week to its travel ban list and is considering adding more.

We previously talked about how, entering into Q4 2021, consumer confidence has been slowly improving while business confidence has been below its decade average.

If concerns about the Omicron variant do materialize, then it will likely contribute to the pessimism of consumers and business owners even amidst the holiday season, which could hinder the Philippine economy’s recovery.

Many investors have taken this as a reason to sell.

However, when looking at how the PSEi constituents performed during Q3 2021, the index’s Q4 2021 performance may not be as grim as it is set out to be.

In Q3 2021, the Philippines experienced a surge in Delta variant cases, which prompted the government to heighten quarantine restrictions.

Many were forecasting businesses to struggle as a result of the stricter measures. That said, many of the PSEi constituents still managed to generate revenue growth.

Of the 30 members, 26 had an increase in revenues during Q3 2021 compared to Q3 2020. Meanwhile on a quarter-on-quarter basis, 22 companies recorded similar or higher revenues relative to Q2 2021.

If we assume as a base case scenario that the Omicron variant will have a similar impact as the Delta variant, the PSEi looks relatively safe. 20 companies have similar or higher revenues in Q3 2021 compared to Q4 2020.

Even then, this scenario seems unrealistic with more than a third of the Philippine population already fully vaccinated.

If we look deeper at the five companies with the largest market cap (excluding Financials), only SM Prime Holdings (SMPH:PHL) saw a decline in year-over-year sales in Q3 2021, as the firm struggled to sell its real estate units.

However, SMPH and the other four companies were still profitable in 2020, with Uniform ROAs ranging from 3.9%-6.9% during the worst of the pandemic.

Even after factoring in the Q3 revenue decline, SMPH is still estimated to remain near its 2020 ROAs.

As a result, while the Omicron variant may have depressed the Philippine stock market’s slightly expensive valuation, it’s not a reason to be worried.

As we’ve seen from the revenue and Uniform ROA performance of the PSEi constituents, the index overall will likely continue to perform well even if some quarantine measures are brought back.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
Powered by Valens Research

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