THE PHILIPPINES is one of the few emerging markets where stocks will likely outperform this year, backed by good underlying macroeconomic fundamentals, double-digit earnings growth and reasonable valuations, investment experts from British banking giant HSBC said.
In a press briefing on Friday, HSBC head of equity strategy for Asia Pacific Herald Van der Linde said that globally for this year, the bank had a slightly “overweight” recommendation on equities and “underweight” recommendation on fixed income.
“Overweight” is a recommendation to buy stocks in excess of a benchmark index, typically the MSCI index, while “underweight” is the opposite recommendation.
For equities, HSBC favors developed markets over emerging markets this year, noting that last year’s headwinds may persist due to weakening commodity prices, a monetary tightening cycle by the US Federal Reserve and softness in global exports.
But HSBC has handpicked a few emerging markets where prospects were brighter. Sifting through Asia-Pacific, the British bank has an “overweight” recommendation on the Philippines, China and Indonesia.
For the Philippines, the HSBC strategist said the bank was overweight after a “neutral” stance in the last couple of years because valuations had gone down to “reasonable” levels while earnings growth this year was projected at 10 percent, better than the 4-5 percent projected average earnings expansion for the whole of Asia-Pacific.
“The Philippines has always been great story but it’s expensive,” Van der Linde said. “We changed our mind and now think it’s fairly valued.”
This year, despite escalating political noises ahead of the hotly-contested May presidential elections, Van der Linde said the situation was still fluid and he preferred not to overanalyze. He added that there were certain drivers in the economy that would run independent of political dynamics. Policy thrust is important but he said he would take a look more closely once the elections were over.
“Politics is usually overstated when it comes to near-term eocnomic fundamentals,” said Benjamin Pedley, HSBC Private Bank regional head of investment strategy for Asia.
“So you go back to earnings growth. The amount of purchases that will take place in Jollibee will probably not change too much. It’s not as if people will say, oh I won’t go to Jollibee today because there’s a new president,” Van der Linde said.
Because stock valuations have gone gone to reasonable levels while underlying fundamentals were bright – the Philippines being one of the fastest economies in the region while corporate earnings were growing at decent levels – he said this was one of the few emerging markets that would stand out amid the volatile global financial markets.
In China, another favored emerging market, HSBC sees economic growth stabilizing at 6.7 percent this year and next year. Pedley said China’s large infrastructure-building would make the economy more efficient and create more jobs. HSBC also sees no need for China to significantly value its currency further to become competitive.
While the renminbi may weaken throughout the year, this will more likely be for cyclical and not structural reasons, Van der Linde said. Nonetheless, he said investors would have to get used to a more volatile Chinese currency. HSBC likes “new stories” evolving out of China, revolving in themes such as Internet, water, solar and wind energy businesses.
In Southeast Asia, HSBC favors the Philippines and Indonesia, the region’s most populous nations. “The Philippines is more of a consensual overweight for quite a few people. Indonesia is more of an emerging (turnaround) story, almost like a new Philippines, you could say,” he said.
Elsewhere in the region, HSBC is underweight on Taiwan and India.
As investment fundamentals vary wildly among BRIC – an acrononym referring to what were previously the hottest emerging market bloc of Brazil, Russia, India and China – HSBC believes that “BRIC” had lost relevance. It has preferred to remain selective, with a preference for Asia, and with a long- term eye on Southeast Asian growth potential alongside its expected population growth and young and relatively cheap pool of labor.
In developed markets, HSBC prefers European equities over US equities. Monetary easing in Europe is seen to continue as opposed to the tightening in the US, although HSBC believes that the US Fed’s tightening magnitude may turn out to be smaller than what markets expect.