Stocks expected to recover this week

The local Philippine stock market is anticipated to rebound this coming trading week following a significant decline in the previous week. The Philippine Stock Exchange index (PSEi) dropped below the 6,000 point mark last Friday, closing at 5,956.33, a decline of 4.52 percent on a week-over-week basis. This was the steepest weekly drop for the year so far, attributed to a weakening confidence in the Philippine economy due to a downgrade in growth forecasts by institutions, tighter monetary policies by the Bangko Sentral ng Pilipinas (BSP), and the peso's depreciation.

A technical recovery could be observed this week, driven by bargain-hunting investors, with the possibility of a brief rebound before another round of bearish movements. The market's price-to-earnings ratio stands at 10.6 times, which is below the last five years' average of 14.4 times and the regional average of 16.2 times. This suggests that the bourse is currently at bargain levels, potentially setting the stage for a short-term rebound.

However, the medium-term outlook for the local market remains bearish due to the deteriorating economic outlook. 2TradeAsia.com predicts a precarious technical condition at the start of the week, with the PSEi close to the critical 6,000 support level. The forecast anticipates gradual positioning as several stocks reach historic lows. A significant market bounce, however, depends on domestic institutional funds stepping in to absorb foreign supply, but there is currently thin conviction without fundamental catalysts.

Inflation data from August, scheduled for release on September 4, is expected to be released. If the print exceeds six percent, it may not be surprising and could maintain the hawkish stance of the BSP into the fourth quarter. In local equities, DragonFi Securities noted that rate cuts have uneven effects, benefiting banks due to higher earning-asset yields. However, this advantage is now being offset by weaker economic growth and the associated credit costs.

Property developers, particularly those with high leverage, face increased debt costs as demand softens, while Real Estate Investment Trusts (REITs) are pressured by widening yield gaps. Growth-oriented stocks also suffer from higher discount rates, which diminish the value of earnings years out. Despite these challenges, DragonFi Securities believes that the downside may be short-lived.

If incoming data on El Niño and wages remain benign, and market confidence grows that the BSP has concluded its tightening cycle, equities will start pricing in the end of the tightening measures well before any actual rate cuts take place.

There will be no trading today due to the observance of National Heroes Day.