The Philippines’ benchmark stock index is set to climb a further 10 percent this year as an expanding economy, slowing inflation and low interest rates lure overseas investment, according to Union Bank of the Philippines.
The gauge may rise to 15 times estimated earnings, from a current multiple of 13 times, said Michael Garcia, who runs the nation’s best-performing equities fund at Union Bank. Foreign purchases have soared to the highest since 2007 this year on the expectation economic recovery will boost earnings, helping to drive the index to a 28-month high last week.
“The market is reasonably valued and deserves some rerating,” Garcia said in a phone interview in Manila today. “Gross domestic product growth in the first quarter was amazing, earnings are getting revised upwards, inflation is benign and the central bank’s interest rate policy is accommodating.”
Philippine economic growth accelerated to 7.3 percent in the first quarter, the fastest pace in almost three years, prompting the government to plan a “substantial” increase in its current 3.6 percent full-year growth estimate. Inflation softened to a three-month low of 4.3 percent in May, supporting the central bank’s decision last week to keep its benchmark interest rate at a record-low 4 percent.
The benchmark gauge last week climbed 3.2 percent to 3,357.05, 10 percent higher for the year to date. It tumbled 2.4 percent as of 11:42 a.m. today, amid a global selloff as a U.S. report showed slower-than-estimated employment growth and on concern over Hungarian debt.
Garcia’s UBP Large Capitalization Philippine Equity Portfolio has returned 31 percent this year. The fund has returned an average 22 percent annually over five years, the highest among Philippine stock funds tracked by Bloomberg, more than double the benchmark index’s 10 percent gain.
The fund invests in eight to 12 stocks to “maximize returns,” Garcia said. Its top four holdings are Aboitiz Power Corp., International Container Terminal Services Inc., Universal Robina Corp. and Alliance Global Holdings Inc.
Daily trading on the Philippine bourse has risen 62 percent to 4.13 billion pesos ($89 million) this year while net purchases by overseas investors grew 69 percent to $3.64 million, according to exchange data.
“This market has legs to rally more,” said Garcia. “Sentiment is generally optimistic and that could provide impetus for this market and attract more investments. I don’t think the bull is dead.”
The Philippines is getting a “second look” because of its economic growth and the smooth presidential election process, according to Peter Hames, who helps manage $50 billion as director for Asian equities at Aberdeen Asset Management Asia Ltd. Still, Aberdeen hasn’t made any “strategic changes” to its Philippine holdings that make up 2 percent of its standard regional fund, he said.
“The Philippines has only a handful of companies that we like and we are already invested in them,” said Hames. “The world’s facing some major problems. The state of the economic recovery in the U.S. and the debt crisis in Europe will affect liquidity.”
Garcia said he may add to his holdings of banks and developers on the expectation demand for mortgages and loans will increase as the central bank will probably avoid raising interest rates “sharply.” He favors ports, energy and consumer-related stocks.