The local stock market is on a roll for the fourth year in a row but the Philippine growth story —a rarity in this period of a global downswing—is just so compelling that investors are turning bolder in conquering uncharted territory. The next big milestone of 6,000 for the main-share Philippine Stock Exchange index is likely to be breached next year, according to stock experts.
The bulls see a lot to feed on, notwithstanding some concerns on rich local valuations: An above-trend growth rate supported by resilient remittances and business process outsourcing (BPO), benign inflation that favors corporate expansion and a rise in earnings as well as a further central bank monetary easing. The market also looks up to additional sweeteners such as a spending boost from the upcoming mid-term elections in 2013, faster implementation of the public-private partnership (PPP) projects and a prospective sovereign credit-rating upgrade that could bring in not just more foreign portfolio inflows but also attract much-coveted foreign direct investments that for so long have evaded what used to be called the “sick man of Asia.”
“Whereas a lot of houses have said that the Philippines is overvalued, if you look at the growth ratio of individual stocks, it’s still quite cheap, considering it’s trading below 1x PEG, so that’s not taken into account,” said stock market veteran Wilson Sy, a director at Philequity Management. Sy said PEG (price/earnings to growth) is the more appropriate way to look at valuations now rather than simply price to earnings (P/E). “We were not growing (in the past) the way we’re growing this way around,” he said.
Based on Philequity’s estimate, the local stock market is trading at 18.7x expected P/E for 2012 and 16.1x for 2013. This ratio means that investors are paying “x” times the amount of money the market is making for a given period.
For Sy, “certainty” is what makes the Philippines stand out during a period of global volatility. “There’s more certainty in the growth of Philippine stocks that are listed compared to other countries like Korea and Taiwan, which are very reliant on exports. And our market is really driven by consumer demand, so we can have more certainty on the growth of these companies,” Sy said.
Philequity is targeting an index level of 5,600 by the end of this year and 6,000 to 6,200 for 2013, supported by a 16-percent projected growth in corporate earnings next year.
CLSA Asia-Pacific Markets head of research Alfred Dy sees the rollout of PPP projects, prospective mergers and acquisitions (M&As) and sustained earnings growth in a record-low interest rate regime driving the main index toward 6,000 in 2013. Earnings growth in 2013 is seen by CLSA at 15 percent, faster than the 10-percent current market consensus growth for 2012.
Dy said it appeared that the PPP program was “showing some signs of life,” adding that as much as seven contracts worth a total of $2.16 billion might be awarded under this framework by 2013. “M&A activity should continue to spice up the market and these are likely to be in the areas of property, banking, consumer, infrastructure and power,” Dy said.
The fresh monetary stimulus by the US Federal Reserve and the country’s new creditor status would also keep interest rates low, Dy said, adding another “trigger” to the market’s upswing alongside strong foreign inflows from overseas Filipinos and BPO revenues. Locally, CLSA sees a reduction of the reserve requirement on banks by regulators a possibility, thus giving more room for banks to finance the demands of the expanding economy.
Nisha Alicer, head analyst at DA Market Securities, said it was indeed “more fun” to invest in the Philippines these days, with the PSEi likely rising to new highs of 5,700 to 6,000 within this year or the first quarter of 2013.
“The Philippines continues to be a safe haven amid volatility in external markets stemming from the debt crisis in Europe and slowing global growth particularly in the world’s largest economies—US, China and India. Furthermore, the local market has continued to outperform the region on a convergence of positive factors as the government continues to lay the groundwork for sustained economic growth in the next years to come,” she said.
In the first semester, the Philippine gross domestic product grew 6.1 percent —much higher than the 4.2-percent pace a year ago and much faster than the 4.9 percent trend growth rate during the nine-year Arroyo administration.
Alicer summed up the factors that converged to support the local market’s climb to further heights: Low interest rates, with another Bangko Sentral rate cut foreseen during this fourth quarter, coupled with benign inflation, improved regulation for banking and real estate segments, primarily to provide a structured growth and avoid “bubbles”; characteristically robust consumer spending to be further supported by 2013 elections and the “demographic dividend;” bulk of PPP projects expected to be rolled out in 2013 estimated at P112-billion, a record P2-trillion national budget for next year; anticipated tourism boom from the new gaming hub, the Manila Bay Entertainment complex and new infrastructure to enable this, ongoing expansion by developers, as well as increased efforts by the Department of Tourism as a mandated focus by the current administration; possible investment grade for the sovereign credit by 2013-2014 (from the current rating of one to two notches below investment grade), and resilient remittance growth through overseas workers and burgeoning BPO sector.
DA Market sees corrections as “buy” opportunities, specifically from any modest negative shock or increased market volatility in external markets.
In a joint research on seasonality in the Philippine equities market by First Metro Investment Corp. and the University of Asia and the Pacific, October is one of the best months to start accumulating. “The odds of generating positive returns are higher when buying in October and holding it for two to five months,” FMIC-UA&P said in the October issue of the joint publication “The Market Call.” The joint study covered the period from 1988 to the present.
“Compared to a month ago, we are now more comfortable in increasing exposure to Philippine risky assets as we approach yearend. While risks from external factors remain, we do not see an imminent risk aversion among investors in the near-term,” FMIC-UA&P said, noting that the major liquidity-easing measures recently taken by the US Federal Reserve and the European Central Bank have averted this scenario.
On Sept. 13, the US Fed announced that it would purchase an additional $40 billion worth of agency mortgage-backed securities a month to further stimulate the world’s biggest economy. Shortly before that, the ECB also mapped out its own bond-buying program to inject liquidity into the euro zone. Key central banks across the world are on a monetary easing or “dovish” mode, raising expectations that the local counterpart will continue to follow such path.
“On the local front, fundamentals remain healthy. Macroeconomic outlook remains bright, earnings expectations are robust and seasonality is positive. All these shape our more constructive outlook for the fourth quarter,” the FMIC-UA&P research said.
9-month review
“Instead of searching for bargains (there are none), investors should focus on profitability and profit momentum. In general, we believe upside potential is easier to justify for companies with ROEs (return on equity) that have room to improve and earnings growth seen to maintain momentum,” said Jose Mari Lacson, head of research at Campos Lanuza & Co.
From January to September, the PSEi has surged 22.3 percent, aided by net foreign buying, which surged six times to P95.21 billion compared to the same period last year. The market has risen to new highs by more than 20 times this year, boosting market capitalization by 28.5 percent year-on-year to P10.54 trillion as of end-September. The index gain was accompanied by higher trading volume. Total value turnover for the nine-month period reached P1.31 trillion, 25-percent higher than the level registered in the same period last year.
“The market’s sustained increase has presented attractive valuations for listed firms to raise capital at the exchange this year,” PSE president Hans Sicat said, noting that total capital raised from the stock market in the first nine months reached P174.97 billion, exceeding the full-year 2011 figure of P107.5 billion, which was the highest amount raised in a single year. This developed as two landmark equity deals were completed this year—the P80-billion preferred shares issue of San Miguel Corp. (that paved the way for the buyout of the controversial government block) and a P43.5-billion stock rights issue by Banco de Oro Unibank to boost core or tier 1 capital.
Three initial public offerings were also completed during the period—those of GT Capital Holdings Inc., East West Banking Corp. and Calata Corp. Capital-raising was likewise buoyed by the follow-on offerings of First Gen Corp., Belle Corp., Alcorn Gold Resources Corp. and The Philodrill Corp., the PSE reported.
In terms of sectoral indices, the financial index emerged as the best performer in the nine-month period, climbing 41.5 percent. This was closely followed by the property index with a 40-percent rise. The holding firms sector, meanwhile, gained 28.2 percent, followed by the industrial sector, which jumped 15 percent. The services sector rose 11.4 percent.
Only the mining and oil index did not benefit from the year-to-date upswing, declining 15.6 percent in the nine-month period in contrast to its outperformance in 2011. The industry has been spooked by concerns over a new mining policy framework issued by the Aquino administration that was not seen as conducive to new investments and cast doubts on the security of mining contracts. Adding to the sector’s woes was the mine tailings spill out of the Padcal, Benguet, mine site of the country’s biggest mining company, Philex Mining.
“As a portfolio manager, I would probably put a small part of the portoflio to mining but not a major part of it,” said Philequity’s Sy, noting that he would choose companies that were already operating and not the “speculative” ones that would not likely chalk up revenues until five to seven years down the road.
Challenges
All told, investors are buying into the Philippine growth story, hopefully for the long haul.
CLSA’s Dy, however, said there were three key risks to watch out for: A spike in oil prices, rapid peso appreciation against the dollar and further delays in PPP project implementation.
As the country heavily relies on oil imports, any unexpected spike in global commodity prices could dampen economic prospects like in the past when skyrocketing food and fuel prices tempered growth. Given muted global economic prospects, a demand shock is widely seen as a remote risk. However, supply-side risks such as those related to geopolitical events are more difficult to gauge.
Crude oil has increased by more than 20 percent from its recent low in late June but from an inflation-perspective, it was just 7.3 percent higher year-on-year. “The potential inflationary impact on pump prices has been partially muted due to a 1.3-percent strengthening of the peso-dollar rate,” said Campos Lanuza’s Lacson.
Still on the exchange rate, Lacson said the main issue for investors was the direction and volatility of the peso because that would dictate where the BSP would take the liquidity of the system. “The BSP has to consider the impact of a relaxed monetary policy on both foreign investment and external trade flows because of the currency impact on inflationary drivers such as crude oil and consumption drivers such as domestic incomes of OFW (overseas Filipino worker) families,” he said.
Philequity’s Sy said a strong peso would indeed affect OFW and BPO earnings. But in the case of OFWs, he said based on his group’s remittance business (via Western Union), what was noticeable was that overseas Filipinos tended to send more dollars to compensate for the decline in the peso equivalent of their remittances. On the other hand, he said a strong peso would be good for inflation management as this would temper import costs. He said the Bangko Sentral has thus been “quietly intervening” and likely to ease interest rates further to align with the moves of its major peers across the globe as well as to curb any sharp local currency appreciation against the dollar.
Any major delay in the government’s promise of infrastructure boost such as through the PPP framework is also seen as a potential risk moving forward. Since he assumed office in mid-2010, investors have high hopes that President Aquino—with his high popularity rating and commitment to good governance—can bring the Philippines to the next level, to become Asia’s next tiger economy.