PH in early stages of bull run, says COL Financial

The Philippine stock market still offers a lot of room for long-term investors to grow their portfolio as the local bourse is only in the early stages of a bull cycle, according to leading online stock brokerage COL Financial.

The main-share Philippine Stock Exchange index is likely to explore the 10,000-territory in 5.5 years as improved domestic economic fundamentals will fuel corporate earnings growth and investor optimism, COL Financial head of research April Lee-Tan said in a recent briefing.

But it won’t be a smooth ride up given serious external problems in the United States, Europe and even China, she said.

Lee-Tan also said current valuations were unattractive and that the equity placements by companies were sapping liquidity and may weigh down the market over the short term.

The PSEi has been on an upswing since 2009 but Lee-Tan said that the bull cycle started in early 2000s when equities bottomed out from Asian crisis lows. Since then, the local market contracted in only one year—in 2008 when it fell by 48.3 percent to 1,872.85 due to the US financial crisis.  The local index since then has nearly tripled and posted multiple record highs starting 2011.

The PSEi closed at 5,285.91 last Friday.

In analyzing whether the local stock market was nearing any “bubble” situation—or a situation where lofty and irrational prices are bound to collapse—Lee-Tan said debt levels were still far from being a concern. She said one of the characteristics of a late-stage bull market was excessive borrowings but in the case of the Philippines, although borrowings were picking up, these were still very low.

Lee-Tan noted that Philippine household debt to GDP [gross domestic product] ratio was only at 5.6 percent, or much lower than the level seen in other countries, while total debt to GDP is 31 percent compared to 58 percent in 1997, when the Asian currency crisis erupted.

Investments likewise have a long way to go as the ratio to GDP was only at 17 percent in the first quarter compared to around 20 percent in the past.

Lee-Tan said COL Financial’s base-case scenario is that if annual corporate earnings growth would consistently rise by 12 percent and the market would relate to a forward-looking price-to-earnings ratio of 16x, the PSEi may hit 10,000 in 5.5 years. She said this should be the case given that interest rates were much lower now compared to previous years.

This scenario implied an annual compounded growth rate of 12.9 percent for the index.

A PE ratio of 16x means that the investor is paying 16 times what the companies are expected to make in a given year.

The most bullish scenario is if trend growth in corporate earnings would rise to 15 percent and the market would tolerate a PE ratio of 18x, in turn translating to a compounded annual growth rate of 20.9 percent for the index. Under such a scenario, she said the index could hit 10,000 in as short as 3.5 years.

The worst-case scenario is if earnings would grow by only 10 percent a year and the market would stick to trading at the historical PE ratio of 14x. In this case, she said it would take eight years for the PSEi to climb to 10,000.

Given COL Financial’s favorable view, Lee-Tan said COL Financial’s recommended portfolio comprised mostly growth stocks: Metropolitan Bank, Banco de Oro Unibank, Metro Pacific Investments, Ayala Corp., Alliance Global Group Inc., Ayala Land Inc., EEI Corp., Puregold Price Club and SM Prime Holdings.