At the market, bulls refuse to be cowed

The good news is the local stock market ended higher for the fifth straight year despite the external shocks of 2013. The bad news is local equities remained in bear territory at its yearend level of 5,889.83, having pulled back by 20.4 percent from its 2013 peak of 7,403.65.

Tapering has definitely been the year’s biggest game-changer, taken by foreign portfolio managers as a cue to pocket gains from pricey Southeast Asian markets, like the Philippines, and move back to recovering Western markets or North Asia. It kept the Philippines from having another banner year, after it posted five successive quarters of over 7-percent growth and bagged a much-coveted sovereign rating from all three major credit agencies this year.

“If it’s just left to fundamentals, the Philippines has a strong macro story,” said Philippine Stock Exchange president Hans Sicat.

He said global markets had overreacted to the US Federal Reserve’s tapering of bond-buying activities.

For years, the US Fed’s “quantitative easing” (QE)—infusion of additional liquidity into the financial system by buying back $85 billion in bonds each month—had benefited emerging market assets. The QE came about when the Fed realized that its targeted interest rate, which was already near zero, could not be cut any further. It had to resort to large asset buying operations to create a tide that would lift the economy.

But the QE can’t go on forever. With the US showing signs of recovery, the US Fed has started scaling back its bond-buying activities this January by $10 billion to $75 billion a month. This has created volatility in regional markets.

“Once the tapering overhang is out of the way, then people will start focusing on the fundamental story,” said Michaelangelo Oyson of BPI Securities.

The Philippine story, he said, continues to be supported by overseas remittances and expansion of the business process outsourcing industry.

“The risk continues to be funds flow and the valuation gap between North Asia and Southeast Asia, because Southeast Asia can’t trade at a significant premium for a long period of time over North Asian markets,” Oyson explained.

At present, he noted that China was looking cheap while Japan was seeing a resurgence in interest due to efforts to stimulate the economy. At present, he said global funds were moving to Japan, China and Taiwan.

Infrastructure-building

The Philippines still managed to attract foreign investors as indicated by its net foreign buying position of P15.59 billion for 2013, although this marked an 85.83-percent decline from that of 2012.

While tapering is beyond the Philippines’ sphere of influence, the government—after installing fiscal discipline and taking steps to curb corruption—can boost investor confidence with its infrastructure-building program.

“The economic outlook remains fairly positive especially if government accelerates the awarding of PPP (public-private partnership) projects,” Oyson said.

Sicat agrees that, as long as the Philippines is able to push its infrastructure agenda, investors who are becoming more discriminating will continue to be drawn to the country.

Retesting highs

In 2013, the PSEi climbed by a modest 1.33 percent, led by gains in the counters for holding firms (+5.41 percent) and services (+8.2 percent). All other counters ended in negative territory: financials (-6.42 percent), industrial (-2.11 percent), property (-4.3 percent) and mining/oil (-38.59 percent).

Many investors locked up gains as external pressures intensified. On the other hand, the sharp slump in the mining/oil counter reflected the uncertainties in the regulatory environment.

Asked to sum up his expectations for 2014, Sicat said it would be “muted growth” compared to 2013.

“We’ve had a good run-up, and most companies will still have a good year,” Sicat said. “I think the Philippine story on branded consumer side will continue to be a main driver.

The question is, Sicat asked, “if real estate would be as robust.”

Across the region, investment professionals are increasingly getting worried about bubble risks. In the Philippines, however, real estate experts and even the local central bank have yet to see such risks.

Earnings

Oyson said corporate earnings in 2014 would still likely grow by a single digit. In 2013, extraordinary trading gains chalked up by the banking sector boosted earnings. But for the new year, these will be difficult to replicate.

“The upside will come whether investors will re-rate the Philippine market, as we’ve seen in China and Indonesia where markets took off not because of EPS (earnings per share) growth but because of the multiples investors ascribe to the market. These would be earnings three to four years down the road,” Oyson said. “Liquidity is also important, because liquidity can result in companies that will trade above valuations for a long period of time.”

For 2014, Jonathan Ravelas Banco de Oro Unibank sees the PSEi surging to as high as 7,500 before consolidating at the 7,000 level.

At 7,500, he said this would be equivalent to a 2014 price to earnings (P/E) ratio of 20x, which means investors are willing to pay 20 times the money they will make for next year. At 7,000, this is equivalent to a P/E ratio of about 18x.

“Among the companies that will likely enjoy higher share prices next year are those in consumer goods, retail, real estate, construction and tourism industry. OFWs (overseas Filipino workers) for instance, spend a big portion of their money on food and housing,” Ravelas said.

“Meanwhile, the rising affluence of the Filipino, affordable mortgage rates and amortization, and the backlog in supply of housing have been a boon to real estate developers. Constructions firms, and those engaged in the business of supplying construction materials, will also perform well given the reconstruction needed in regions affected by Supertyphoon ‘Yolanda.’”

Oyson said the market would likely be comfortable trading at a P/E ratio of 18 to 19x 2014 earnings. At present, the market is trading at about 17x P/E.

“I don’t think we’re entering a period of a stock market bubble yet. We haven’t seen the valuations that we saw in China and Indonesia at the height of market exuberance, reaching 30x P/E,” Oyson said.

“The key for 2014 is really looking for companies with strong room to surprise the market in terms of EPS growth,” Oyson said, adding that the “growth companies” could be found in the power, consumer, infrastructure and telecommunications sectors.