Managers at the three best performing Philippine equity funds see a much rosier second half for Rodrigo Duterte's term as president, forecasting that the benchmark stock index will climb about 25% over the next three years.
The Philippine Stock Exchange Index gained just 2.6% in the first half of Duterte's term, which started at the end of June 2016, and was among Asia's worst performers in that span. After surging to a record in January 2018, the gauge collapsed amid rising inflation, a weakening peso and the U.S.-China trade war. But cooling prices and interest rate cuts have fueled an 18% rebound since November, and reawakened the bulls.
"We are on a clear economic growth path and the drivers are very clear," said Julian Tarrobago, head of equities at ATR Asset Management Inc. "Consumption, accommodative monetary policy and a massive increase in infrastructure spending pave the ground for growth acceleration," said Tarrobago, whose ATRAM Alpha Opportunity Fund has returned 26% under Duterte.
The president launched a 9 trillion peso ($176 billion) program to build airports, railways, roads and bridges under his six-year term. Fund managers see this push combined with the central bank's monetary easing stoking consumer spending and speeding up economic growth. Gross domestic product rose 5.6% in the first quarter of 2019, the slowest pace in four years.
"Faster economic growth is to be expected, and this will be more spread out given the infrastructure projects are in many places," said Noel Reyes, chief investment officer at Security Bank Corp. "As long as GDP grows more than 6%, any selloff means investors are in a panic and selling without factoring the fundamentals," said Reyes, whose SB Peso Equity Fund gained 14% in the first half of Duterte's term.
Tarrobago, Reyes and Gerard Abad, chief investment officer at AB Capital & Investment Corp., all say the stock benchmark PSEi could reach as high as 10,000 before Duterte's term expires in June 2022. While the gain in Philippine equities should be broad-based, property, infrastructure and consumer staples are likely to outperform the market, they said.
Foreigners have purchased a net $400 million in the nation's stocks this year, after selling more than $1 billion in 2018, according to data compiled by Bloomberg.
The recent rally has driven the PSEi's valuation to 16.5 times estimated 12-month forward earnings, compared with 13.3 times for the MSCI Asia Pacific Index. Still, Philippine stocks are trading below the 20-times level they reached in four rallies dating back to 2013.
Possible external negative factors that could hamper further gains include higher oil prices, worsening of the U.S.-China trade war and geopolitical tension over Iran. At home, Duterte faces execution risks with his infrastructure drive and planned shift to a U.S.-style federal government structure.
Positives could include further upgrades in the nation's credit scores. AB Capital's Abad says this is possible due to the infrastructure investment plans and greater certainty of passage for fiscal reforms including lower corporate taxes given Duterte's stronger support in congress. Abad's AB Capital Equity Fund climbed 13% in Duterte's first three years.
"A credit ratings upgrade is a strong message about the current state and prospects of the economy," Abad says. "It's an added catalyst for foreign investors not to pass up on Philippine equities. The market is yet to see its peak."