Stock Market Blueprint - Philippines
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In Summary:
- With a Price Earning Ratio (PER) of above 14x, the Philippine stock market remains to be the most expensive. This is above the country's 15-year average of 15.5x but still significantly lower that it's peak of 16.7x back in 2007. (BPI Asset Management)
- Philippine PER is higher than Asian market PER of 12x (Julian Tarrobago Jr., ATR Kim Eng Asset Management)
- While expensive, fund managers still believe that the PSEi will surge in the fourth quarter and end the year with record highs. BPI Asset Management said that 5,500 is very much achievable. While Julian Tarrobago of ATR Kim Eng has set a higher target of 5,800.
- Growth will be powered by a surging Philippine economy, better than expected corporate earnings, low inflation rate, and higher market turnover (participation in the stock market).
- Sector-wise BPI is still bullish on PROPERTY firms, CONSTRUCTION companies, and FINANCIAL institutions.
- Mr. Tarrobago on the other hand suggested looking at small cap stocks that are "less-known, small and medium-sized companies capable of strong growth."
The Philippine Stock Exchange (PSE) has been one of the best performing equity markets,
returning 18.19% year-to-date as of June 25, as foreign participants helped support the bourse’s
robust growth. Data showed that the Philippines garnered US$283 million worth of foreign buying in
May when peers (Indonesia, Korea, Taiwan, and Thailand) all reported net foreign selling. Global
players seemed to be convinced by the country’s improving economic backdrop: a resilient banking
sector, improved debt ratios, benign inflation expectations, and unwavering dollar flows from the
BPO sector and from OFW remittances. Much of the foreign interest was reflected in the strong
take-up of GT Capital’s initial public offering last April 20, where the foreign tranche of the offer was
more than five times subscribed.
In valuation terms, however, the Philippine stock market remains to be the most expensive, flashing
a 2012 forecast Price-Earnings ratio (PER) of 15.83x, above the country’s 15-year average of 15.5xbut significantly lower than its peak of 16.7x back in 2007.
Assuming a 10% year-on-year earnings growth rate for 2012, a PER of 16.7x implies a PSEi level
of approximately 5,500. Is this level possible to reach? Figures from 1996, 2007, and 2011 (years
when the PSEi recorded the highest year-end closing levels) indicate that the country is indeed in a
far better position today. First, OFW remittances and BPO revenues continue to support domestic
consumption. Second, record high gross international reserves provide a healthy buffer for external
shocks. Third, the average annual inflation rate, although higher, remains well-within the
government’s target range. Fourth, banks’ asset quality continues to improve and serves as
insurance against potential banking-system led crises. Lastly, the PSE’s market turnover continues
to trend higher. With these numbers in mind, we do not see any reason why the PSEi cannot reach
the 16.7x PER target and the 5,500 level by year-end.
In the mean time, we believe that local and foreign investors will take cue from political and
economic developments abroad. New found semblance of stability in Europe will lead to a liquidityled re-rating of the local bourse once again. In instances when the market sells on negative news
on the European front and weaker economic data from the US, we will increase our positions in
preferred names.
Sector-wise, we continue to like property firms, construction companies, and financial institutions—
the best performing sectors year-to-date. We believe these sectors have the highest probability of
posting earnings surprises in 2012, if the economy posts stronger-than-expected growth. Within
these sectors, we remain selective about the issues we prefer, only positioning on undervalued
companies with predictable earnings streams driven by the very nature of their competitive
advantages. We cannot discount, however, that there are still looming concerns on the Euro-zone’s
debt crisis, China’s hard landing, and Asia’s mounting inflation.
We reckon that these risks are manageable. First, lower interest rates in the Euro-zone may be
forthcoming in the second half of 2012, as we expect economic growth to suffer on the back of a
longer-than-expected recovery. While it is too early to call for deflation in the zone, the lack of a
swift fiscal/monetary policy response (similar to Bernanke’s response in 2008) will be the catalyst to
restructuring. Second, we believe that transition is on the way in China. We expect the government
to be more reliant on open market operations to stimulate the economy in the medium-term as it
shifts from an export- and investment-led economy to a consumption driven economy. Finally, we
do not see any major threat from inflation in light of a slowing global economy. Food prices in the
Philippines (which account for roughly 50% of the consumer price index) are down 6% to 16% from
year-end 2011 levels while Dubai crude is down 14%.
-0-
Jullian Tarrobago Jr. "Alpha Dog" Business Mirror (June 24, 2012)
Should we start selling our stocks?
"Prudence dictates we that we are actually in a position for a fourth-quarter surge toward 5,800 points and/or a sustainable, long-term rally for the PSEI—where stocks remain under-owned.
Yes, Philippine stocks are still under-owned. I’m not referring to how much foreign portfolio inflows remain lodged in the market. I’m talking about how the Philippines, despite its outstanding fundamental growth outlook and much-improved investment risk profile, only has a trivial, 1.2 percent weighting in the MSCI Asia ex-Japan index (MXASJ).
MXASJ is a globally recognized index, created to measure the equity market performance of Asia (excluding Japan). It is comprised of 10 countries, each with an assigned a weighting—based on market size, turnover and free float. The biggest weights are allocated to China (24 percent), South Korea (21 percent) and Taiwan (15 percent), while the smallest weights are assigned to Indonesia (3.6 percent), Thailand (2.9 percent) and the Philippines (1.2 percent)."
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