Philippine market: The bulls are still running

Good outlook for the rest of the year, despite the index already rising l9 per cent

Gulf News

The Philippines stock market is on a bull run and has been one of the fastest growing markets in the world this year. It has climbed close to 19 per cent year-to-date and its valuation has reached an all time high of 18.86 times earnings. It is now an expensive market in which to invest.

Gulf News spoke to Manila-based analysts about their outlook for the market and their favorite stocks.

Maria Theresa Marcial-Javier, senior vice president at BPI Asset Management, said: “Despite the uncertainty in the global economy, we have [been very willing to take risks] in our portfolio allocation for 2013.”

She pointed to the strength of the Philippines domestic economy, in particular consumption growth, which should be able to cushion the share market from any crisis that could engulf the global economy this year. She foresees the [market index] ending up between 17 and 22 per cent year-on-year for 2013, driven in part by local investors seeking better returns. However, there has also been international interest in the market and foreign net inflows have quadrupled since November 2012, mainly to large capitalization companies.

She expects robust economic growth in the Philippines to continue, with a 5.5 to 6 per cent growth rate for this year, supported by strong remittance growth, low interest rates and the continuation of the upswing in the investment cycle.

“We foresee minimal changes in [interest rates] given the stable political outlook, benign inflation and the fact that the local financial system is flush with liquidity. Not surprisingly, the monetary authorities have signaled they will be accessing the local market more frequently for further fund raising and [there will be] less dependency on foreign borrowing,” Marcial-Javier explained.

She expects corporate earnings to improve by between 12 and 15 per cent year on year, [in part because of a] reduction in the cost of capital. Core earnings growth will be fueled by strong consumer growth - domestic product expands every election year due to incremental spending - stable margins, steady commodity prices (of oil in particular); and investment in key industries, like infrastructure, power, gaming, tourism, real estate and mining.

This earnings growth will allow the market to trade at a price:earnings ratio of between 15 and 20 times earnings moving forward, predicted Marcial-Javier, especially if the Philippines attains investment grade status in the next 18 months.

“[We] remain overweight in equities which are expected to be the preferred asset class [because of their] superior returns,” she said.

Luz L. Lorenzo, head research economist, Maybank ATR Kim Eng Inc., Manila, also believes equities will continue to rise rapidly because of low interest rates, solid economic fundamentals and the respectable outlook for corporate profit growth.

“Philippine stocks are among the most expensive and will continue to be so. First-time investors with a long-term view should be prepared to wait for a while because the risk of a correction becomes greater as stocks continue to shoot up. As long as economic fundamentals are solid and companies are not over-leveraged, any correction hopefully will not last long,” he said.

Lorenzo warned that investors should be aware of: the continuing weakness in advanced economies, slow investment that will retard growth momentum and rising interest rates as the world moves away from the financial crisis Gregg Adrian R. Ilag, equity analyst at AB Capital Securities, pointed out that inflation could start to go higher in the second half of the year, possibly triggering some upward pressure on interest rates in the money markets. He pointed out that while 2013 corporate earnings were strong, they were still far from the peaks reached in during the 1990s.


Maria Theresa Marcial-Javier

Senior vice president and Group Head

BPI Asset Management, Manila


Low interest rates are expected to prevail for at least the next 12 months, which should encourage local investors to allocate a greater proportion of their savings to property.

Philippine rental yields [are among] the highest in the region at eight to 10 per cent a year, which is attractive compared to [other investments]. A combination of a strong macro-economy, extremely low mortgage rates and a healthy pipeline of projects from developers, should cause the faster appreciation of land values.

We favour Ayala Land (ALI) by virtue of it having the largest land bank in Metro Manila. In 2012, revenues from residential development spearheaded ALI’s earnings growth, [and it had] higher bookings and project launches across all brands. We believe this trend will continue as management plans capital expenditure of P65.5bn for 2013 to complete ongoing developments and 69 projects are expected to be launched (worth P129bn).

Holding Companies

Listed holding companies are a proxy for sectors benefiting from the strong economic growth: consumer, property and financials. They also provide a direct means to participate in the government’s efforts to increase infrastructure spending. The Aquino administration has earmarked private-public partnership projects amounting to Php214bn for 2013 to improve the country’s infrastructure and attract more foreign direct investments.

SM Investments Inc. (SM) is a direct beneficiary of consumption spending, with 46 malls in the Philippines and four in China. SM is currently trading at a consensus net asset value of P970 a share, but we expect [this to increase] in the near term to reflect higher land values.

Ayala Corporation (AC) will benefit directly from the Philippines’ low interest rate environment and infrastructure expansion plans. AC is well positioned to secure at least one of the [public-private partnership infrastructure] projects given its low [debt] and healthy cash position. It is currently trading at a 31 per cent discount to its consensus net asset value estimate of P787 a share. However, a [better] rating is a strong possibility given that its subsidiaries BPI and ALI are trading at all time highs.


Underweight on this sector. Delays in mining projects [because of legislative changes] have resulted in downgraded earnings for big-ticket projects [and been a drag on operator shares]. Given that local elections are scheduled for May 2013, we don’t expect the final version [of the new legislation to be in place until after the third quarter of this year, once] newly elected officials have began their mandates.

Gregg Adrian R. Ilag

Equity Analyst

AB Capital Securities Inc., Manila


San Miguel Purefoods has stable earnings growth [an estimated nine per cent a year until 2015], robust cash flow, and exceptional branding and business [operations]. It is the cheapest consumer [stock] in our coverage at seven times 2013 earnings.

Jolibee Foods is a best-in-class local fast food company accounting for at least 60 per cent of the Philippine fast food industry. Branch network expansions in the Philippines and internationally should propel earnings growth to 19 per cent a year to 2015. Jolibee is trading at 1.3 times its 2013 price to book value, which is inexpensive for the hefty earnings growth.


Metropolitan Bank and Trust Company is the Philippines’ second largest bank in terms of assets, loans and deposits. The top three Philippine banks are on track to maintain their growth trajectory, yet Metropolitan is a laggard when it comes to share price appreciation. We think valuations are undemanding at 1.75 times 2013 price to book value.

Security Bank manages to deliver consistently stellar investment returns. Security is one of the best performing publicly listed banks in the region in terms of return-on-equity, because of higher intermediation costs and above average loans growth compared to the banking sector.

Holding Companies

First Philippine Holdings is the cheapest way to gain exposure to the Philippine energy sector [as it has] several power assets It also has one of the biggest discounts to net asset value among conglomerates in our coverage.