Investment bank upbeat on emerging markets

American investment bank JP Morgan is upbeat on Philippine stocks in the year ahead, when it sees exploiting diverging trends in monetary policy and managing volatility as the key investment theme.

In a Nov. 17 equity research paper written by Adrian Mowat, chief emerging market (EM) and Asian strategist, JP Morgan said the likely increase in the US Federal Reserve’s target rate to 2.5 percent by the end of 2016 from near-zero levels at present would not be a problem for most emerging markets, if such monetary tightening were in response to firmer growth.

Mowat said investors should also understand which countries enjoyed the US Fed’s recently-ended monetary stimulus—via bond buyback activities known as quantitative easing (QE)—or zero interest rate policy-driven credit or asset bubbles.

“EM equities certainly did not. Property prices only in Malaysia, Hong Kong and Taiwan have outpaced nominal GDP (gross domestic product) since 2008. China’s property bubble was a domestic event. Admittedly, this was compounded by pro-growth policies in response to the global financial crisis,” Mowat said.

In reviewing countries for 2015 equity strategy, Mowat considered valuation, confidence in earnings per share (EPS) forecasts, beneficiaries of lower oil prices and commodity prices, policy direction, monetary policy and export exposure.

Part of Mowat’s call for 2015 was to put the Philippines “back to overweight.” This is a recommendation for investors to accumulate stocks in excess of a benchmark index like the MSCI.

For 2015, JP Morgan sees Philippine EPS expanding faster than the 6.6 percent in 2014. The country’s compounded EPS from 2009 to 2015 was estimated at 12.4 percent.

It also sees the earnings multiple or price to earnings (P/E) ratio next year to ease to 18.2x from about 20.9 this year. A P/E multiple of 18.2x means investors will be willing to pay 18.2 times the amount of money they expect to make for the period. When earnings forecasts are upgraded, the earnings multiple goes down.

Return on equity from Philippine stocks is estimated at 14.3 percent.

Elsewhere in the region, JP Morgan also upgraded China to overweight as the sluggish economy was seen to result in a market-friendly easing of policies. It, likewise, kept its overweight rating on India, Indonesia and Thailand.

“In Asia, play the divergence in policy. China’s growth problems have a silver lining with lower energy and commodity prices delivering an inflation dividend. Policy makers can focus on growth, if they choose to. In mercantile Asia, they will be happy to maintain competitive currency policy. Think of it as neither fighting nor following the Fed,” Mowat said.

The JP Morgan strategist noted that potential monetary stimulus in Europe and Japan would provide an alternative funding source away from US dollars.