Philippine stock volatility is surging at the fastest pace in emerging markets as foreign investors sell the world’s most expensive equities on speculation the U.S. will reduce monetary stimulus.
The Philippine Stock Exchange Index’s 10-day historical volatility increased to 33 yesterday from 12 two weeks ago, the highest level since October 2011 and the biggest jump among 21 developing-nation gauges tracked by Bloomberg. Overseas money managers sold a net $78 million of the nation’s shares yesterday. The PSE index fell 1.3 percent at the close in Manila, extending its drop from a May 15 record to 9.7 percent.
A four-year rally has driven the PSE index’s valuation to 19 times estimated profit, the highest level among gauges in 45 emerging and developed markets. While foreign inflows and record earnings helped Philippine shares produce the best risk-adjusted returns among major markets since March 2009, Schroders Plc says increased volatility will deter investors as the U.S. Federal Reserve moves closer to scaling back its bond-buying program.
“There is still a fair bit of profits that can be taken if the volatility continues,” Lee King Fuei, a Singapore-based fund manager at Schroders, which oversees more than $300 billion, said in a phone interview yesterday.
The PSE index dropped the most among benchmark equity gauges in Asia today, falling to a 10-week low of 6,643.58. BDO Unibank Inc. and Robinsons Land Corp. sank at least 2.7 percent. The Philippine index has gained 14 percent this year, compared with a 3.6 percent increase in the MSCI Southeast Asia Index and a 5.2 percent drop in the MSCI Emerging Markets Index.
The Philippine gauge returned about 350 percent since equity markets bottomed during the global financial crisis in March 2009 through May 20. Adjusted for volatility, the PSE index’s 20 percent gain in the same period is more than twice the Standard & Poor’s 500 Index’s 9 percent advance, data compiled by Bloomberg show. Volatility measures the degree of price swings relative to the historical average.
The four-year rally in Asia’s 12th-biggest equity market has coincided with $7.3 billion of foreign inflows, a 116 percent surge in PSE index profits and the nation’s first investment-grade rating.
Philippine growth prospects haven’t changed as a result of increased volatility in the $245 billion stock market, said Marvin Fausto, who oversees about $20 billion as the chief investment officer at BDO Unibank in Manila.
Philippine economic growth unexpectedly accelerated to 7.8 percent in the first quarter, the fastest pace in almost three years, as President Benigno Aquino boosted investment and state spending, according to official data released on May 30. The expansion will remain elevated as the government targets growth of as much as 7 percent this year, Finance Secretary Cesar Purisima said in a May 29 interview in Singapore.
The decline in stocks “is not due to reasons of our own making,” BDO Unibank’s Fausto said. It’s a “perfect opportunity to come in,” he said.
Emerging-market assets from Indonesian stocks to South Africa’s rand have slumped as gains in U.S. employment and housing spurred investors to raise bets the Fed will reduce its $85 billion in monthly debt purchases, known as quantitative easing, later this year.
The Jakarta Composite Index sank 4.4 percent in the three days through yesterday, the largest three-day decline since June 2012. Foreign institutional investors sold $171.2 million of Indonesian equities yesterday, the most since August 2011. The rand lost 11.3 percent against the dollar last month, leading declines among 24 developing-nation currencies tracked by Bloomberg.
Fed Chairman Ben S. Bernanke said in response to questions following Congressional testimony on May 22 that the central bank could consider reducing the amount of Treasuries and mortgage debt it buys within “the next few meetings” if officials see signs of sustained improvement in hiring.
“Investors are becoming more uncertain as to the continuation of QE,” said Khiem Do, the Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management Ltd., which oversees about $51 billion.
The combination of expensive valuations and high returns during the past few years has left Philippine shares vulnerable to further outflows, said James Thom, a money manager at Aberdeen Asset Management Plc, which oversees about $322 billion worldwide.
The PSE index’s price-to-estimated earnings ratio of 19 compares with the five-year average of 13. The MSCI emerging markets index has a multiple of 10, while the S&P 500 trades for 14 times projected 12-month profits, according to data compiled by Bloomberg.
The Philippines is “one of the markets that has done particularly well in the region and an obvious source of profit for the more nervous investors,” Thom said in a phone interview from Singapore. “It remains relatively expensive.”