Philippine Stocks Cheapest Since 2011 as Growth Belies Rout
Philippine stocks are proving too cheap to pass up for two of the nation’s biggest money managers after falling the most since 2011, as companies post record profits and economic growth outpaces the world.
The equity market was among the hardest hit in Asia as global shares lost $2.4 trillion since Federal Reserve Chairman Ben S. Bernanke said on May 22 that the central bank could consider paring stimulus should the employment outlook show sustainable improvement. The Philippine Stock Exchange Index (PCOMP) has dropped 12 percent from a May 15 record and now has an earnings yield of 5.2 percent, versus the 3.4 percent average on the nation’s debt. The last time the gap was this wide, in September 2011, the index rose 31 percent in six months.
BDO Unibank Inc. (BDO) and Metropolitan Bank & Trust Co. (MBT) say they’re switching out of bonds to buy equities. The economy expanded at a faster-than-estimated 7.8 percent pace in the first quarter, more than China’s 7.7 percent, and analysts increased profit forecasts for companies in the benchmark index to a record. While foreigner investors sold $267 million of Philippine stocks this month and exports fell in April, BDO says the gauge will jump as much as 23 percent by next year.
“This correction has opened a very good opportunity,” said Marvin Fausto, who oversees about $20 billion as the Manila-based chief investment officer at BDO, the country’s biggest money manager. “The idea is to keep buying on this weakness.”
The PSE index, which fell less than 0.1 percent to 6,513.20 in Manila today, will rally to as high as 8,000 next year, Fausto, who helps run this year’s second- and third-best performing Philippine stock funds, said in a June 9 phone interview. The $186 million BDO Institutional Equity Fund and the $267 million BDO Equity Fund (EPCIBEQ) both returned about 14 percent since the end of December. That compares with an average gain of 6.7 percent for 32 Philippine equity funds tracked by Bloomberg.
Metropolitan Bank, the third-biggest Philippine money manager, has been buying shares of lenders during the retreat and has overweight positions on property and consumer stocks, Allan Yu, a Manila-based vice president who helps oversee $10 billion, said in a June 10 phone interview. Yu and Fausto declined to name specific stocks they are purchasing.
Bank of the Philippine Islands, the country’s biggest lender by market value, has dropped to 17 times estimated profits from as high as 23 times in February. Bloomberry Resorts Corp. (BLOOM), a Manila-based casino and hotel operator, has a forward price-to-earnings multiple of 30, down from 53 in January, according to data compiled by Bloomberg.
The PSE index has retreated 12 percent since May 22, the biggest drop among 18 equity gauges in Asia tracked by Bloomberg after Thailand’s SET Index (SET) and Japan’s Topix. (TPX) The MSCI All-Country World Index slipped 3.2 percent during the same period as Bernanke’s comments lifted U.S. Treasury yields and reduced appetite for riskier assets.
Philippine equity valuations are still high relative to regional peers and data this month cast doubt on the strength of the country’s economic growth.
The PSE index trades at 18 times projected 12-month earnings, versus the MSCI Southeast Asia index’s multiple of 14. The Philippine gauge’s earnings yield of 5.2 percent compares with 6.8 percent for the regional measure, according to data compiled by Bloomberg. The 1.6 percentage-point gap is bigger than the average spread of 0.54 percentage point, or 54 basis points, during the past three years.
Philippine unemployment increased to 7.5 percent in the three months through April, the highest level in three years, the government said on June 11. Exports (PHEXYOY) shrank 12.8 percent in April, exceeding the 5.3 percent median of 12 estimates in a Bloomberg survey.
Gains in Philippine shares will be limited because the country’s economic expansion isn’t strong enough to counter rising interest rates around the world, according to Alan Richardson, a Hong Kong-based money manager at Samsung Asset Management.
“This will restrain valuation upside,” Richardson, whose $149 million Samsung Asean Equity Fund (5670800) outperformed 97 percent of peers tracked by Bloomberg during the past three years, said in a June 18 interview.
The yield on 10-year U.S. Treasuries (USGG10YR) has climbed more than 20 basis points during the past month, while the rate on the BofA Merrill Lynch Global Government Index increased 11 basis points to 1.41 percent. Treasury 10-year note yields were little changed at 2.18 percent yesterday after climbing five basis points the previous day on speculation the Fed may indicate when it will begin slowing bond purchases after a two-day policy meeting that concludes today.
The Philippine index’s 30-day historical volatility rose to 36 yesterday, the highest level since January 2009. Even after the slump, the index has advanced 282 percent from its low during the global financial crisis in October 2008, the biggest bull-market rally among equity gauges in 45 emerging and developed countries.
Stocks surged through last month as President Benigno Aquino’s efforts to tackle corruption and increase spending on government projects boosted investor confidence in the $225 billion economy. The country won its first investment-grade credit ratings this year and state borrowing costs have halved from three years ago, according to the BofA Merrill Lynch Philippines Government Index.
The economy’s 7.8 percent growth in the first quarter was the fastest in almost three years, beating all 22 estimates in a Bloomberg survey of economists. It was the quickest first-quarter expansion among 40 countries tracked by Bloomberg.
The Philippine economy probably will grow 7 percent this year, compared with a previous estimate of 5.7 percent, Michael Spencer, chief Asia economist at Deutsche Bank AG in Hong Kong, wrote in a June 17 report. The global economy will expand 2.2 percent, the Washington-based World Bank said in a June 12 report, less than a January forecast of 2.4 percent.
PSE index profits will increase another 6.9 percent to a record in the next 12 months after climbing 19 percent during the past year, according to more than 240 analyst estimates compiled by Bloomberg. That compares with projected growth of 5.1 percent for the MSCI Southeast Asia Index, a gauge of shares in the Philippines, Indonesia, Malaysia, Thailand and Singapore.
“The fundamentals haven’t changed,” said Metropolitan Bank’s Yu, who estimates the PSE index will climb about 21 percent during the next 12 months. “The economy is still on a strong growth trajectory.”
The Philippines has scope to ease monetary policy to protect growth, central bank Governor Amando Tetangco said in a Bloomberg Television interview on June 14. Inflation held at a 13-month low of 2.6 percent in May, government data showed.
Higher equity valuations in the Philippines are justified by the country’s long-term growth prospects, David Gaud, who helps oversee about $30 billion as a senior portfolio manager at Edmond de Rothschild Asset Management, said in a June 13 phone interview from Hong Kong.
Aquino is seeking more than $17 billion in infrastructure investments to increase output and create jobs in the nation of 105 million people. Companies from San Miguel Corp. (SMC) to Ayala Corp. and JG Summit Holdings Inc. (JGS) are bidding for the nation’s airport and railway projects. Investment in the first quarter surged 47.7 percent from a year earlier, compared with a 9.5 percent gain in the previous period, according to the government.
“We are getting to a point where most of the negative news is priced in” for Philippine stocks, Gaud said. “We are more comfortable they will recover and you should be able to get a positive return in the coming six-to-12 months.”
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