Stocks seen moving into uncharted territory
The Philippine stock market started 2012—and the Lunar “Year of the Water Dragon”— with a big bang despite lingering challenges to the global economy. Can the main index sustain a strong momentum for the rest of the year?
Most stock experts think so and the consensus is that the main-share Philippine Stock Exchange index would continue to climb for a fourth straight year this 2012 and surge past 5,000. But it’s not expected to be a smooth upward line in this trek toward uncharted territory.
“While the Dragon is known to be auspicious, water is unpredictable, sometimes calm, other times raging,” said Gonzalo Ordonez, president of First Metro Securities. “So the key is to stay focused and be nimble.”
Like most trading participants, First Metro Securities expects the local market to continue its upswing this 2012, but warns that it can be a tough uphill climb as external head winds from 2011 remain unresolved and new market risks are likely to surface.
Fund manager Paul Joseph Garcia, senior vice president at Bank of the Philippine Islands, said the market’s recent breakout to new highs could be an indication that investors were “re-rating” the market. A favorable re-rating suggests that investors may be willing to buy stocks at a higher price due to certain new catalysts.
Garcia, who manages the country’s largest equity fund, is looking at 5,000 or even 5,500 as the best-case scenario within 2012.
Stock market veteran Wilson Sy’s target for the index is 5,300. “But I’m not sure if it will be this year or next year,” he said.
April Lee-Tan, head of research at leading online stock brokerage CitisecOnline.com, said the PSEi could easily end the year at 5,400 as the market trades back to its historical average price-to-earnings (P/E) ratio of 16x on the assumption that global risk appetite would improve.
A P/E ratio of 16x means that the market is paying 16 times the amount of money the company is making in a given period.
January effect
In January, the market indeed started to see an improvement in global risk appetite. Based on the latest global fund managers’ survey by BofA Merrill Lynch, broad-based expectations for additional monetary easing by Western central banks supported a “slightly better” risk appetite in January. For instance, nearly 80 percent of investors surveyed expected quantitative easing by the European Central Bank in early 2012.
Global and emerging market growth expectations also improved. Only 10 percent of fund managers surveyed by Merrill Lynch expected that China—a key engine of the global economy—would suffer a “hard” landing (less than 7-percent gross domestic product growth) in 2012. When China recently came out with its 8.9-percent fourth-quarter 2011 GDP growth, it was a positive surprise for global markets.
“But while cash positions have come down, global investors are still light in equities relative to history and reduced their allocation to [emerging market] equities this month,” BofA Merrill Lynch said in its research. Such cautious tone means that sentiment could only eventually improve and further benefit the local stock market.
January is usually an upbeat season for stocks trading as investors take a fresh risk-taking position after closing their books in the preceding year. With the influx of foreign portfolio funds into the local market gobbling up large-cap stocks, particularly Philippine Long Distance Telephone Co., the additional liquidity has buoyed the local stock barometer. While PSEi was up by a modest 4 percent in 2011 when it outperformed all other markets in the region, since the start of the year, it has already risen by 307.93 points or 7 percent as of Friday’s closing of 4,679.89. After breaking out of the previous all-time high of 4,550, a new peak was established at 4,747.90 last Jan. 20—the last trading day before the Lunar Year turnover.
2011 in review
The mining and oil counter emerged as the runaway outperformer at the local stock market last year, rising 68.5 percent. This was driven by buoyant commodity prices that allowed a number of mining firms to turn around alongside merger and acquisition (M&A) activities that made the sector exciting.
The holding firms, services and the financial counters posted modest gains, respectively rising 3.4 percent, 1.6 percent and 0.8 percent. Telecom companies helped perk up the services counter with optimism on the consolidation of PLDT and Digital Telecommunications.
On the other hand, the industrial counter declined 2 percent last year as high input prices gnawed at margins. The year’s worst performer, however, was the property counter, which declined 6.4 percent on concerns of oversupply in residential condominium units.
“Performances of global equity markets in 2011 were driven mainly by “hot money” flows. Amid uncertainties and fears over Europe, investors scrambled for safe haven assets. High foreign equity ownership and the more liquid markets in Asia [excluding Japan] were hurt the most as foreign investors were able to sell assets more quickly. On the other hand, this has benefited smaller and relatively illiquid markets such as the Philippines and Indonesia,” said First Metro Securities in its 2012 outlook.
Based on PSE documents, capital raised at the local bourse reached P107.5 billion in 2011, the highest total amount raised in a single year. This was 26.6-percent higher than the amount raised last year and also breached by 19.3 percent the previous record posted in 2007.
Foreign investors were net buyers in 2011 in the amount of P56.52 billion, higher than the year-ago comparative net buying figure of P35.62 billion as more corporations raised capital, whether through initial public offerings (IPOs), follow-on offerings, stock rights and private placements.
Five companies debuted on the local bourse in 2011— Megawide Construction Corp., Puregold Price Club Inc., Cirtek Holdings Philippines Corp., Calapan Ventures Inc. and Touch Solutions Inc.—raising a total of P9.04 billion from the market. Meanwhile, capital proceeds from private placement, stock rights offerings and follow-on offerings amounted to P42.85 billion, P40.61 billion and P15 billion, respectively.
Total value turnover for 2011 registered a new record high of P1.42 trillion, 17.8-percent higher than the level at end-2010. The combined market capitalization of listed issues in the PSE at yearend came in at P8.7 trillion, supported by the 5-percent improvement in domestic market capitalization, which finished the year at its highest ever level of P7.24 trillion.
2011 vs. 2012
Last year was a “bruising” period for global equity markets, First Metro Securities said. “While 2011 was the year of the sovereign debt crisis, backdrop for 2012 will be the painful repayment of bills in the developed world, global economic slowdown, and unavoidable policy changes,” the brokerage said, noting that substantial policy progress is still needed in the US and the eurozone.
“Despite the shared sense of urgency, solution to the developed markets’ fiscal woes will continue to be difficult. Debates over entitlements, welfare, and reduction of debts will persist. As a result, there will be periods of market dislocations and rapid price changes in the wake of policy responses in the developed world. This could present short-term trading opportunities,” it said.
The brokerage firm said money flows would still be “key” to equity markets’ performance this year. It projected that countries with attractive macro and micro fundamentals would draw inflows, while a rise in global risk aversion would result in strong outflows regardless of fundamentals.
“Equities with high and sustainable dividends will outperform as investors seek higher yield in a low-yield world. Should market conditions gradually improve, we will see investors take on more risk and at the same time keep high dividend paying equities as a safety net,” First Metro Securities said.
The brokerage expects Asian economies to gradually slow down in 2012 due to the outlook of a slower growth path in the developed world but views “resilience in adversity” for the Philippine economy.
“In our view, MSCI Philippines is set to outperform by 11 to 20 percent in 2012 on the back of high earnings growth, a resilient economy, and strong foreign fund inflows. Overshooting of gains above 20 percent is likely, assuming that the nascent signs of recovery in the US economy become more pronounced and/or QE3 (third phase of quantitative easing by the US Fed) is implemented,” it said.
CitisecOnline.com’s Lee-Tan said 2012 was starting with conditions considered to be highly favorable for the stock market.
“Corporate earnings are expected to recover in 2012, given the low base in 2011. Corporate earnings should also benefit from falling inflation and weak commodity prices as the said factors should boost end user demand and reduce margin pressure. Interest rates are also expected to drop due to expectations of lower inflation and the strong possibility of a ratings upgrade,” she said.
Lee-Tan said the government likewise appeared to be starting to “get its act together” by boosting fiscal spending, bidding out the first public-private partnership project (Daang Hari Link Road) and swiftly enacting the 2012 budget.
“Higher government spending and the rollout of projects should benefit the economy. As we have said before, there is no shortage of investment opportunities as implied by the country’s very low investments-to-GDP ratio. The government just needs to unlock these investment opportunities by either increasing spending itself or making these projects available to the private sector that is currently awash with cash. We are confident that we will start seeing this happen in 2012,” she said.
Is the ongoing impeachment trial against Supreme Court Chief Justice a key concern for the stock market?
Not right now, but it may have some impact toward the end of the process, said veteran broker Joseph Roxas, president of Eagle Equities Inc.
“If he is found guilty, it will have an impact. But if he is not guilty, it may have more impact because it could mean that P-Noy [President Aquino] will have a difficult time implementing his programs with a hostile judiciary,” he said.
