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Philippines property may be key to equity market recovery

Real estate stocks in the Philippines are among the top winners of the global value rotation and look poised to become a key part of the country’s post-pandemic stock-market recovery.

A gauge of Philippine property stocks has jumped 15% so far in November, on track for its biggest monthly gain in more than a decade, according to data compiled by Bloomberg. That’s four percentage points more than the rise in the Philippines Stock Exchange PSEi Index, a benchmark the property shares are now set to beat for three months straight.

The sector is in pole position to benefit from the country’s unexpected rate cut Thursday, as the central bank seeks to kickstart growth after the economy contracted more than expected in the third quarter.

The real estate equity resurgence has already helped Philippine stocks claw back losses of as much as 41% at the PSEi’s bottom in March to just an 10% drop for the year as of Thursday.

Southeast Asian stocks have been among the biggest beneficiaries of the recent global shift to cheaper, cyclical names as the development of a COVID-19 vaccine and a burgeoning recovery in China stokes optimism about the global economy next year. Equity markets in the region such as Thailand and Singapore have led gains across Asia.

Industrials, real estate and financial stocks make up more than 80% of the PSEi, and the cyclical exposures of those sectors will be key to the outlook for the market, Nomura Holdings Inc. analysts including Abigail Chiw said in a note Wednesday.

“We expect the conglomerates and property sectors to lead the recovery, having come from a very low base this year,” they wrote. For real estate shares, “we expect sequential earnings recovery to be led by residentials on catch-up construction of ongoing projects, followed by malls on pent-up demand and later by hotels as COVID-19 fears subside.”

An unexpected jump in remittances from overseas Filipino workers in September may also help contribute to an increase in spending on real estate.

The Nomura analysts forecast conglomerates and property stocks will post earnings-per-share growth next year of more than 50%. That should help push the PSEi toward their 7,600 target, they said — about 9% higher than the near-7,000 level it traded at Thursday.

Still, the recovery isn’t without risks, the analysts said. A fragile labor market and limited fiscal measures could both constrain private consumption, according to the note.

“A stronger-than-expected earnings-per-share recovery could potentially propel the PSEi higher to 8,300, while downside risks of weaker-than-expected macroeconomic drivers could drag it lower to 6,600,” the analysts wrote. – Bloomberg

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