Too much liquidity keeps stock values high

The Philippines is on a structural economic growth upswing but with a lot of new wealth created, there is just too much money keeping stock valuations expensive, according to British banking giant Standard Chartered.

Prospects for the Philippines are favorable, being a “positive” and “success” story and a “story that’s just starting,” said Stanchart global head of macroeconomic research Marios Maratheftis. The economist said the Philippines, along with Indonesia, would lead Southeast Asia’s outperformance over other regions of the world.

Philippine gross domestic product (GDP), which Stanchart expects to grow by 6.9 percent for the full year, is seen moving in the “right direction” and if all plans and programs push through, there was no reason that the Philippines could grow 8 percent or more by 2015 or 2016, the economist said in a briefing last week.

The public-private partnership (PPP) model for building infrastructure is seen to spur economic growth. At the same time, the country’s debt-to-GDP ratio of 81 percent was “incredibly low” compared to other markets, Maratheftis said, adding that the economy was growing at a faster pace than credit.

One area where the Philippines is lagging is foreign direct investments (FDIs) but Maratheftis said there was room for the country to catch up on FDIs.

As far as asset classes were concerned, Stanchart expected equities to still outperform although for the next 12 months, the bank preferred developed markets over emerging markets, he said.

Asked about Philippine equities, Stanchart chief investment strategist Steve Brice said valuations were clearly high and thus a challenge for the market. “I believe in the structural rerating story. I believe that growth has accelerated in a structural manner. There’s not a lot in the way of it accelerating further but … it’s difficult to say that equities here are cheap,” he said.

Lack of investment options was a key challenge for the market, Brice said, noting that the new wealth being created in the economy had little alternative outlets outside of local and US currency debt, local equities and cash.

“It’s natural in that environment, especially when the economy is doing well and people are generating cash flow at the individual levels, that prices will be quite high,” Brice said.

The worst of the market shakeout caused by US Federal Reserve Chair Ben Bernanke’s comment suggesting a shift from “QE (quantitative easing) infinity to QE tapering” may have passed, but Brice said it was still difficult to make a compelling case for Philippine equities due to valuation concerns.

While there was a long-term relationship between nominal GDP growth and corporate earnings, Brice said such relationship was “not linear.” Valuation premium to Philippine equities made sense given the faster growth pace compared to other markets, Brice said, but excess liquidity was seen keeping valuations high.

“Overall, a lot money chasing too few assets usually leads to assets being expensive,” Brice said. “If you’ve got 10-percent nominal (GDP) growth in the next few years, then equities won’t be expensive anymore.”

On foreign exchange, Stanchart sees the peso underperforming this year as a result of the US Fed’s intention to taper its aggressive bond-buying, which the bank bets will happen within six months. But once the market has fully digested the US Fed’s tapering, Maratheftis said the peso should see some moderate appreciation next year.