Stock Market Risks and Opportunities in 2021

April Lynn L. Tan, CFA

COL Chief Equity Strategist

Key Points

The reopening of the economy and the low-interest-rate environment in bonds and cash are seen to drive stocks higher. Opportunities: Expected to perform strongly this 2021 are stocks with high dividend yields and growing profits like telcos, power companies, and REITs. Banks and select property stocks are also seen to rebound. Risks: Vaccine rollout might be delayed, hurting consumer and business confidence, and cause share prices to go down. To manage risk, don’t be too heavily invested. Also, be prepared to take profits on stocks that go up sharply and just buy them back when prices go back to more attractive levels.

Despite rallying sharply from its March 2020 low, the Philippine stock market can continue to go up in 2021.

Although economic conditions and corporate earnings remain poor, the focus is now on the availability of COVID-19 vaccines, which should bring the global health crisis to an end, allow economies to reopen, and businesses to return to normal.

The low-interest-rate environment also makes stocks more attractive compared to cash and bonds. Aside from the fact that the dividend yields on numerous stocks are higher than yields on cash and bonds, bond prices are vulnerable to any potential increase in interest rates that may result from improving economic conditions given the inverse relationship between bond prices and interest rates.

Among the many companies listed in the PSE, we expect stocks with high dividend yields and growing profits to be popular this year given the low-interest-rate environment. Stocks that have these characteristics include telcos (TEL, GLO), power companies (AP, MER), and REITs (AREIT).

Banks and selected property stocks are also expected to perform well in 2021. Banks were among the worst performers in 2020, with the PSE Financial Sector Index down by 22.3% which is more significant than the PSEi’s decline of 8.6%. Banks underperformed the market due to concerns that the pandemic would lead to higher non-performing loans (NPLs).

Nevertheless, given the improving outlook of businesses next year, NPLs should peak soon, reducing the need for banks to continue aggressively setting aside provisions. This in turn should help banks’ profitability to return to normal, allowing banking stocks to catch up with the rest of the market.

Property stocks with attractive office leasing portfolios are also expected to perform well in 2021. One of the major surprises for 2020 is the resilient demand for grade A office space from the BPO sector. This, coupled with the low-interest-rate environment and the successful performance of the country’s first REIT (AREIT), should allow property companies with large portfolios of grade A office buildings to successfully unlock the value of their office properties and recycle capital by listing REITs. Companies that have announced plans to list REITs include DD, RLC, and MEG.

However, the stock market’s performance in 2021 will most likely be volatile.

A lot of stocks, led by large cap issues, are already expensive in terms of valuation, after prices went up sharply in the fourth quarter of 2020 due to optimism over the availability of COVID-19 vaccines.

Moreover, although vaccines are already available in developed countries, it will take time to reach our shores and for the government to vaccinate enough people to reach herd immunity. If the vaccination process suffers delays, there is a risk that consumer and business confidence will remain poor in 2021 leading to disappointing economic numbers and corporate earnings results. This in turn could cause share prices—that already reflect a very positive outlook for 2021—to go down instead of up.

Because of this, manage risk by not being too heavily invested. Also, be prepared to take profits on stocks that go up sharply and become expensive. Just buy them back when prices go back to more attractive levels.

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