Philippines Faces Perfect Wave of Liquidity, Credit Suisse Says

Philippine stocks may enter a bull- market rally not seen for two decades, lifted by a “perfect wave of liquidity,” Credit Suisse Group AG said.

“Momentum players will ride the wave of ever-stretched valuations,” Stephen Hagger, a Kuala Lumpur-based analyst at Credit Suisse, wrote in a report dated today. He recommends buying shares with larger market values, such as banks and property developers, as well as physical real estate.

The gauge rose 0.4 percent to a record 6,858.59 at 1:44 p.m. local time. The measure has surged 18 percent this year amid expectations economic growth will accelerate and the country will win an investment-grade sovereign rating. The index trades for 21.2 times reported earnings, the highest since 2004, according to data compiled by Bloomberg. The peso has strengthened about 7 percent against the dollar in the past two years, the best performer among emerging-market currencies.

The central bank will likely reduce interest rates to stem futher gains in the currency, according to Hagger. Reduced returns from bank deposits and government bonds will force savers to buy property, given rental yields of 7.3 percent in central Manila and concerns stocks have risen too far, he wrote.

“Huge wealth will be generated,” Hagger wrote. “Some of this wealth will get ploughed back into the property market. Some will end up as conspicuous consumption and therefore trickle down into the real economy, enhancing GDP, increasing earnings and justifying increasing stock market valuations. Some will simply end up in the stock market.”

Bull Market

The Philippine stock index has climbed 303 percent since October 2008, making it the world’s biggest equity bull market. That’s at least 134 percentage points more than every other bull market in emerging and developed nations, data compiled by Bloomberg show. The central has “instituted formal mechanisms” to avoid asset-price inflation from forming, especially in property, Deputy Governor Nestor Espenilla said March 8.

The nation’s credit rating, at speculative grade, will probably be upgraded in the first half, central bank Governor Amando Tetangco said in a Bloomberg Television interview on Jan. 25. Standard & Poor’s raised its outlook to positive from stable on Dec. 20, citing the stability of Philippine President Benigno Aquino’s administration and economic growth.

A 33 percent surge by the benchmark index last year drove the stock market’s value to $223 billion on Dec. 31, data compiled by Bloomberg show. That’s still less than the current market capitalization of Nestle SA or Chevron Corp.

“The biggest turnoff to foreign investors has been liquidity,” Hagger said. “As liquidity continues to improve, it will become a difficult market to ignore, particularly when the market reaches investment grade.”

The stock index may reach valuations last seen in 1997 just before the Asian financial crisis broke, the analyst said.

“Like all waves, it will eventually hit the reef, but the ride could be a good one,” Hagger said. “Grab your board.”

To contact the reporter on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net

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