Business | Investment

Philippines stock market has room to rise

Valuations have become expensive and is a cause for concern

  • By Gaurav Ghose, Financial Features Editor
  • Published: 21:00 August 12, 2012
  • Gulf News

Philippine Stock Exchange
  • Image Credit: AP
  • Philippine Stock Exchange director Alejandro Yu throws chocolate coins during the start of trading for this year at the Philippine Stock Exchange in the financial district of Makati, south of Manila, Philippines in this January 2012 file photo.
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Dubai: The latest deluge that brought life to a standstill in the Philippines seems not to have dampened its financial market.

On Wednesday, August 8, when the Philippines stock exchange resumed trading after it was suspended the day before due to inclement weather, PSEi, its 30-company benchmark index, closed the day higher at 5,308.38, up 0.46 per cent.

Aided by funds from foreign investors, trying to get away from the debt crisis of Europe, the Philippines stock market this year has climbed 22 per cent, hitting record highs more than 20 times.

Much of the surging foreign interest in the Philippines market since last year is credited to the government’s proactive efforts to reign in fiscal deficit, tackle rampant corruption and create a business-friendly environment. This has contributed to a ratings upgrade from all three major credit agencies: Standard & Poors, Moody’s and Fitch.

While the Philippines stock market has emerged as the year’s top performer in Southeast Asia, it has also become the most expensive, currently trading at 17 times expected earnings compared to Thailand’s 10.5 times and Indonesia’s 12.1 times.

In their July 16 report, Nomura Asset Management wrote that while the Philippines market, like Thailand and Indonesia, remain insulated from the global woes, these markets are no longer cheap and it was going to keep its current, overweight positions.

Asean Investment Management currently has limited exposure to the Philippines market. “We are underweight due to valuation issues,” said David O’Neil, its Singapore-based chief investment officer, “Currently value is lacking in the market.”

Sound fundamentals

But, despite steep valuations, some investors still see the index continuing to climb due to the country’s strong economic outlook for the coming years.

“Over a two to three-year horizon, we believe the Philippine market has strong legs to sustain its uptrend given its sound economic fundamentals — five to six per cent annual GDP growth and strong corporate earnings expansion in the range of 10 per cent to 15 per cent,” said Maria Theresa M. Javier, senior vice-president and group head, BPI Asset Management, the biggest unit trust company in the Philippines.

It has investments worth 130 billion pesos (Dh11.4 billion) under management. Gregg Adrian R. Ilag, equity analyst at AB Capital Securities Inc., agreed. “Even though valuations are high, they are not at illogical levels. I expect earnings to catch up, eventually easing valuations to decent levels.”

BPI’s Asset Management’s outlook is at least a double-digit CAGR [compounded annual growth rate] for market returns, sustained until 2014, said Javier.

O’Neil of Asean Investment Management expects an upside of more than 30 per cent over the next two to three years.

In their July report, asset management firm Maybank ATR Kim Eng said that there are several factors that give the index room to rise.

“One is sustained growth in government spending that can offset weakness coming from developed economies and major emerging markets,” writes Luz Lorenzo, market strategist and head of research at Maybank, in the report. And that is the reason for the bank to upgrade the 2012 GDP forecast to 5.4 per cent from 5 per cent previously.

Attracting capital

He also cites that keeping interest rates low, because of low inflation of 3 per cent year on year for the first half of 2012, is likely to positively impact the market.

Next year’s outlook for inflation remains benign and it is likely that low interest rates will continue to attract capital flows into the Philippines. His optimism is also based on robust private consumption, which accounts for 70 per cent of the GDP, and which has shown no signs of flagging.

“We see the risks as mostly coming from a prolonged and protracted global economic slowdown given the financial volatility in the Eurozone, the fiscal problem in the US, and China’s own growth concerns,” said Javier. “Politically, the risk may come from a possible escalation of tension with China, pertaining to the Scarborough Island.”

Ilag is also wary about inflation. “In terms of risk, we think that significant risk comes from inflation over the long term,” he said. “The current easing measures will cause higher inflation in the years to come.”

Where to invest?

In the first half of 2012 all sectoral indices were positive, led by real estate and banking stocks. The financial index surged 34.6 per cent making it the best performer at the end of June.

BPI Asset Management favours Philippine conglomerates which are well-positioned to benefit from the administration’s infrastructure spending and consumer’s rising disposable income, which should be further buoyed by election spending in 2013, said Maria Theresa M. Javier, senior vice- president and group head, BPI Asset Management.

She believes property and banking stocks will be at the forefront of the market’s upswing. “Property [stocks] remains one of the best proxies for the Philippine economy and we expect their net income growth to be steady as they recognise completion of previous year’s sales. Philippine banks, on the other hand, are expected to exhibit double-digit loan growth moving forward as well. This will be supported by the expected rise in financing requirements by local companies’ participating in the public-private partnership (PPP) projects which are in the administration’s pipeline.”

Maybank has focused on utility and consumer companies, which have continued to provide stable returns, since the beginning of the year. In the July market report, Luz Lorenzo, market strategist and head of research at Maybank, said they were sticking to their current allocations of Universal Robina Corp. Pepsi Cola Products Philippines, First Gen Corp., Manila Water and First Philippines Holding Corp.

Gregg Adrian R. Ilag, equity analyst at AB Capital Securities Inc., said the sectors they like include power, gaming, construction and media.

“We remain bullish on power companies due to the capacity shortages expected to occur in the Philippine regions,” said Illag. “Required additional capacity is approximately 16,550MW over the next 18 years. Out of these only 1,354MW is committed by investors.

“We also like the gaming industry which is going to get a boost from tourist influx in our country. Meanwhile, construction companies are a direct play on the government’s plan to increase spending by releasing more PPP projects. We also favour the media sector as they will be prime beneficiaries on the upcoming election spending.”

Currently he favours: First Philippine Holdings Corp., a conglomerate focused on the power sector and trading at large discount to NAV (net asset value). In media, his pick is GMA Networks Inc. due to its impressive profitability and high dividend payouts.
In the construction sector, he likes EEI Corporation. “EEI’s liquidity, large size and cheap valuations (7x 2012 P/E) makes it attractive,” he explained.

“In gaming, we’re currently looking at Bloomberry Resorts Corporation (Bloom) and Alliance Global Inc. AGI is a conglomerate with a diversified portfolio (food and real estate, among others). It is very attractive in terms of valuations: 10.1x 2011 P/E against the mean of 16x for conglomerates.”

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