PSEi Rebounds, MER Looks Attractive, But Rate Risks Remain | Intelligent Investing Show

[00:00:00]The Philippine stock market finally rebounded last week after dropping sharply because of the Msei rebalancing.

[00:00:07]Is this the start of a recovery or just a short-term bounce? Let's break it down.

[00:00:17]Hi everyone, welcome to another episode of Intelligent Investing. This is April Lean. The PSI rose 2.9% to close at 5,938.38.

[00:00:28]Market breath turned positive with gainers outnumbering losers 142 to 126.

[00:00:33]However, foreign investors were still net sellers selling 853.5 million pesos worth of Philippine stocks. Not surprisingly, several stocks that were heavily sold down because of the Msei related selling bounced back last week, namely ICTSI, Jollibee, and CNPF.

[00:00:53]This is important because some of the selling in the previous week was technical in nature. In other words, some funds sold not necessarily because they disliked the companies but because they had to adjust their portfolios after the Msei rebalancing. And when that technical selling pressure fades, some of these stocks can recover.

[00:01:14]However, not all stocks affected by MSEI related selling rebounded. Ayala land fell by another 2.9% while Moralco dropped by another 2.5%. For Moralco, sentiment was likely hurt by the ERC's announcement that the final determination for its tariff reset may be released in September instead of the original target date of July. This delay implies around 2 months of foregone revenues for the company. From its peak of 662 pesos in April, Moralco has fallen by around 16% to 556 pesos. The stock was sold down for three reasons.

[00:01:48]First, its first quarter earnings were weaker than expected. Second, its waiting in the Msei Philippine Standard Index was reduced. And third, the tariff reset was delayed. But despite these concerns, we think the recent correction has created a buying opportunity.

[00:02:06]>> Despite continuously falling, why is Moralco still an attractive stock? Well, we made a short discussion as to the three reasons why Moralco was sold down and the first one has to do with the weaker than expected performance of the distribution business. So that one during the first quarter, Moralco suffered from a 1.8% drop in distribution volume. I think one of the reasons why investors found this worrisome is concerns that increasing adoption of solar panels is causing this. But that said though um you know when we reached out to Moralco about this they said that they estimate that solarization is maybe affecting them by 1% at most. They are not just going to let solarization disrupt their operations because they're actually participating in it. They have a subsidiary named Mspectrum. Miralco is actively participating in the trend. So it also stands to benefit from solarization. Now the second reason why Moralco fell is because of the um reduced waiting because of the MSCI rebalancing. So if you think about it the reason why Miralco was sold down because of the MSER rebalancing is more technical in nature and not fundamental.

[00:03:18]Now historically stocks that were sold down because of index rebalancing usually bounce back immediately after.

[00:03:25]So we think that there is an opportunity brought about that selling because it really isn't fundamental. And then finally is of course the delay in the tariff reset. The ERC says it's going to delay the tariff adjustment for around 2 months. Definitely the delay is bad news. But that said, I think what's important to highlight that it is just a delay and it is not a cancellation of Moralco's application to increase tariff rates. So that said, I mean the long-term outlook for Moralco is still good. And I think on top of that, its longerterm growth outlook remains attractive because its power generation business is still projected to grow substantially because it has a lot of capacity in the pipeline and valuations have become attractive. At this point, Moralco provides a dividend yield of around 5.6% capital appreciation potential of more than 20%. So definitely the sell-off creates um opportunity for investors to buy moral at a cheaper price. Meanwhile, Plus rose by 95% after falling 17.8% 2 weeks ago.

[00:04:30]Sentiment toward the stock was likely hurt by news that Padcore expects gaming revenues to fall by up to 19% this year.

[00:04:38]This is due to the challenges caused by the Middle East crisis and tighter online gambling restrictions, including the removal of e-wallet links to betting platforms. So, while Plus has already fallen sharply, investors may remain cautious until there is more clarity on gaming revenues and regulation. Another stock to watch is MaryArt or MM. Last week, MaryArt shares were suspended from trading after the company failed to submit its latest quarterly report. The suspension happened around the same time that its board approved a voluntary delisting plan, which would make Mary a wholly owned subsidiary of Double Dragon. Because of this, we reiterate our view from the previous week.

[00:05:22]Shareholders should accept the tender offer given the consequences of a potential delisting. Selling in the market is no longer an option because the stock has been suspended. However, Mary shareholders can still tender their shares at 48 centavos per share. The offer will be paid 50% in cash and 50% in Double Dragon shares. The DD shares will be valued at 9 peso 30 centavos per share. This means Mary shareholders may receive more than 48 centavos per share if DD's market price stays above 9 peso 30 centavos. Last Friday, DD closed at 1192 per share. The key point is this.

[00:06:02]Doing nothing may expose shareholders to the risk of owning shares in aid the listed company, which could become much harder to sell. On the positive side, MREIT rose by 1.2% after announcing that it had signed a memorandum of understanding for the acquisition of 12 commercial assets. This transaction would increase Emirit's gross leasable area by around 47%. More importantly, it should improve the quality of its portfolio. What makes this deal interesting is that the assets are not just offices. They also include five lifestyle malls with a combined gross leasable area of 160,000 square meters.

[00:06:42]This should make Emre's portfolio more diversified. Previously, MRI was almost 100% office-based. After the acquisition, offices will account for around 77% of the portfolio. The new assets also have stronger operating metrics. Their combined occupancy rate is 92% higher than MRI's first quarter occupancy rate of 89%. Their weighted average lease expiry is also longer at around 5.8 years compared to Emre's current 3.1 years. For RET investors, this is a positive development because a more diversified portfolio, higher occupancy rate, and longer leases can improve dividend stability over time. We will be closely monitoring updates on this development as we still don't know whether the acquisition will be dividend accurative.

[00:07:33]>> Can the PSI stay above 5,800?

[00:07:36]>> The outlook in the short term remains quite challenging. I understand that last week there was some good news because inflation for example for the month of May was actually a positive surprise. It fell to 6.8% from 7.2% in April. So that's definitely good news and it was driven by lower food prices, lower transportation prices and lower electricity prices. If you think about it, the main reason why the inflation for the three items actually fell is because of lower oil prices. If we look at what happened in May, oil prices in the global market fell compared to April because of hopes of a peace deal between the US and Iran. The problem is at this point in time, the situation in the Middle East remains very fragile and we're not sure whether a peace deal will actually materialize. If oil prices continue to go up, then there's still a threat that inflation could again go up even more substantially in the future.

[00:08:37]The PSP will also be pressured to increase interest rates. And I think another factor that wasn't there before is the increasing likelihood that the Fed would actually become more hawkish or the Fed increasing Fed rates. What happened last week was the jobs number that came out, the payroll numbers were actually uh more than double what the market expected. Because of that, the market is now expecting or pricing in a 25% rate increase by the Fed come December.

[00:09:12]And the US market responded negatively.

[00:09:15]So the 10-year bond rate in the US actually went up substantially because of that. And you know, the Philippine uh bond rate is right now also going up, which is also worrisome. So I think that's another factor that investors will be looking at aside from developments in the Middle East.

[00:09:37]Early last week, Iran said it would stop negotiations with the US and vowed to completely block the straight of Hormus as Israel's military continued to attack the Iranbacked militia Hezbollah in Lebanon. So if tensions worsen again, oil prices could rebound. If oil prices rebound, inflation pressure could come back. The BSP also remains hawkish despite the better inflation print. The central bank said it will take necessary actions to ensure that inflation returns to a 3% target. This is important because even if prices remain unchanged, average inflation could still remain around 5.7% for the rest of the year because of the low base last year. There is another factor to watch. President Marcos said the government is considering a supplemental budget and possible legislative amendments to help reduce the impact of the oil shock on Filipino consumers. While this could help households, it could also put upward pressure on interest rates. If these measures widen the fiscal deficit, the government may need to borrow more.

[00:10:38]Higher borrowing requirements could push yields higher. Finally, external risks have also increased. The market now expects the US Federal Reserve to raise rates by 25 basis points later this year. This came after the US economy added 172,000 non-farm payrolls in May, which was more than double the consensus estimate of 88,000. Job gains for March and April were also revised higher by a combined 93,000.

[00:11:05]The US market reacted negatively. Last Friday, the S&P 500 fell 2.6% while the Nasdaq dropped 4.2%. Higher Fed rates and the weaker US market are not good for Philippine stocks. They can pressure the peso, push local bond yields higher, and reduce investor appetite for emerging market equities. So to summarize, the PSI rebounded last week after the heavy MSEI related selling in the previous week as some stocks that were sold down sharply recovered. But investors should still stay cautious.

[00:11:37]Inflation improved in May, but much of the improvement was due to lower oil prices. If Middle East tensions worsen again, oil prices and inflation could rise again. The government may also need to borrow more if it pushes through with support measures. And in the US, the Fed may raise rates later this year, adding further pressure on interest rates.

[00:11:58]Given this backdrop, sustained market upside will depend on three things.

[00:12:03]Lower oil prices, easing inflation, and less pressure from both local and US interest rates. That's it for today's market wrap. If you found this helpful, please like this video, subscribe to the channel so you're first to know what's moving the market. Once again, I'm April Tan. Remember to stay sharp, stay selective, and as always, invest intelligently.