For PH, it’s all about making the gradeBy Doris C. Dumlao
Philippine Daily Inquirer
For the local stock market, 2012 was a record-breaking year.
The benchmark index surged to all-time highs, beating all expectations, on the back of record-low local interest rates and unanticipated economic growth.
More companies raised equity to harness strong investor demand, resulting in record capital-raising. The Philippine sovereign is also now on the brink of getting an investment grade rating.
The Philippine Stock Exchange rallied by 1,460 points, or 33 percent, to end 2012 at 5,812.73.
The market broke the index record 38 times last year.
Since bottoming out in 2008 at the height of the global financial crisis, the Philippine index has risen by over three times well into uncharted territories.
But after four years of sustained growth and with stock prices hitting levels some deem to be too steep for the possible yields, the local bourse is now raising brokers’ doubts over the medium term.
For the more pragmatic, another question is whether the local market can continue to attract large foreign portfolio funds, which otherwise are being drawn to others in emerging Asia, particularly China, which is widely seen to be in a much better shape in 2013 than last year.
For Hans Sicat, president and chief executive officer of the PSE, getting the much-coveted investment grade rating would be the game-changer for 2013.
The former investment banker at Citibank said that, beyond all the valuation concerns of the market,
While financial markets have been trading Philippine assets—particularly offshore bonds—as if the sovereign were of investment grade, Sicat said getting the real thing would be another story.
“I guess, until you’re truly investment grade, you don’t see the appropriate investment jump,” he said.
The Philippine sovereign is currently rated a notch below investment grade by all three major credit watchdogs—Moody’s, Standard & Poor’s and Fitch.
Recently, S&P changed the outlook on its rating to “positive” from “stable,” putting the country closer to its aspiration.
Sicat cited Japan Inc. as a good example.
“Most of Japan invests only in investment grade (assets), and only a small portion in non-investment grade, which means there are a lot of them positioning today, waiting for our own re-rating,” Sicat explained. “That’s going to be a huge jump given the multitude of Japanese investors trying to look for improved valuations.”
Japanese investment banking group Nomura said in a recent report that the local stock market was “overpriced,” although it remained optimistic on the Philippines over the long term.
Its recent research said the current valuation premium assumed a worsening environment in the rest of the region. It noted that Philippine stock valuations were among the highest in the region, as market capitalization-to-GDP (gross domestic product) ratio was over 100 percent and credit spreads even lower than those in Thailand and Malaysia.
As such, Nomura has recommended an “underweight” position—a suggestion to reduce exposure relative to benchmark index—for emerging Southeast Asian markets in general.
Looking to 2013, a joint First Metro Investment Corp.-University of Asia and the Pacific Research said investors were, on one hand, seeing a constructive macroeconomic backdrop, healthy corporate balance sheets, and robust foreign funds inflows into the Philippines.
“On the other, valuations are seen to be challenging, and a pullback in prices would be welcome,” it said.
The analysts of FMIC-UA&P see “a strong likelihood of earnings upgrades for many of the headline stocks.
“The question is, will these upgrades be convincing enough to re-rate the Philippines to an out-and-out ‘buy’ versus its Asean neighbors?” FMIC-UA&P asked.
While the favorable economic outlook should underpin the Philippine equity market, FMIC-UA&P sees a “highly selective thematic approach” as the key to outperformance in 2013.
“We will prefer looking at companies that can leverage the country’s macroeconomic story and are tied up to specific areas of growth, such as consumer spending, construction and infrastructure.
We also will not ignore the usual positive effect that elections have on this market—a phenomenon that has occurred in five of the last six elections in the country,” said FMIC-UA&P in the December issue of “The Market Call.”
A re-rating refers to a change in how the market values a company or the whole stock market.
If the market believes that a particular company can chalk up more profits than previously expected, then the denominator in the price to earnings (P/E) ratio increases. This in turn brings down the ratio, which means it is less expensive than previously considered and hence, more attractive.
The P/E multiple is a gauge used by investors in portfolio allocation. At present, for instance, the market is paying 17-18 times the amount of money that they expect to make in the Philippines for 2013 and 18 to 19 times the money they would likely make for the whole of 2012.
Historically, the Philippine P/E ratio averaged at only around 15x, but a record high of about 28x was hit shortly before the 1997 Asian currency crisis.
For those who believe the Philippines remains a very attractive market even when the investment grade is still far off, the 100 million-strong consumer base is seen to be a compelling argument alongside the governance reforms under the Aquino administration.
Global investment bank JP Morgan, for instance, has picked the Philippines as one of its three most favored stock markets for the fourth straight year in 2013.
Also, Banco de Oro Unibank chief strategist Jonathan Ravelas said the stock market “phenomenon” had strong legs to support it.
“The economy is boosted by consumption driven by business process outsourcing revenues and overseas Filipino worker remittances, along with stable macroeconomic numbers. The low interest environment has triggered investors to shy away from savings to spending,” he said.
“At the moment, it seems that the market rally will be sustained and could extend to try the 6,000-6,500 levels as market participants patiently await the investment grade—a rating that allows investors to invest in a country with sound fundamentals [and whose stocks] are worth holding on just like blue chips. At present, looking at all fronts, the country is ready for the upgrade,” Ravelas added.
For this 2013, Sicat sees a “healthy” pipeline of initial public offerings and follow-on offerings. The target is to match the record-high capital-raising of about P200 billion in 2012.
“With relatively low interest rates, stable and predictable cost of money, there will be continued interest in issuances through the stock exchange. And with valuations that are high, many companies will probably [undertake] equity fund-raising as part of their strategy,” Sicat said. “Knowing how cycles go, it’s better to sell equity in a high cycle.”