Duterte Outbursts Taking Toll as Philippine Stock Losses Mount

Obama Cancels Meeting With Duterte After Outburst
  • Overseas investors pull most money in a year on Wednesday
  • President’s behavior could be disruptive: BDO Unibank

Losses in Philippine stocks are accelerating, with foreigners pulling more money from Asia’s most expensive market amid speculation the outbursts of President Rodrigo Duterte will have consequences that go beyond politics.

The Philippine Stock Exchange Index fell 1.3 percent to 7,619.10 in its biggest decline in five weeks. The gauge has dropped 6 percent from a 15-month high on July 21, paring its gain this year to 9.6 percent. Foreign funds pulled $58 million from local equities Wednesday, the most in almost a year, and have sold a net $333 million in an 11-day run of outflows. The index is down 2.3 percent this quarter, the only decliner among major Asian markets.

Duterte’s threat to swear at U.S. President Barack Obama if he criticized an anti-drug campaign that’s left around 2,400 dead, and the subsequent cancellation of a meeting between the leaders, “didn’t sit well” with overseas investors, said Rafael Palma Gil, a portfolio manager at Rizal Commercial Banking Group in Manila. Duterte’s behavior is taking the shine off a market that had been an investor favorite due to one of the highest economic growth rates in Asia.

“The latest incident raises concern that President Duterte’s unpredictable behavior in politics will be disruptive and could eventually spill into economics and business,” said Jonathan Ravelas, chief market strategist at BDO Unibank Inc., the Philippines’ biggest lender. It’s “further weakened a market that’s already been made vulnerable by uncertainty over U.S. interest rates, elevated valuations and overseas fund withdrawals,” he said.

The Philippine index is trading at 18.3 times 12-month estimated earnings. While that’s down from 19.6 in July, it’s still the highest in Asia and at a 32 percent premium to the MSCI Asia Pacific Index. The country’s economy expanded 7 percent last quarter from a year earlier, after 6.8 percent growth in the first three months of 2016.

Investors may be better off holding cash in the near term as the index could test its 7,500 support level, said BDO Unibank’s Ravelas. The gauge could fall as low as 7,330 in the next two months over concerns the budget deficit will rise when taxes are cut and spending raised, April Lee-Tan, head of research at COL Financial Group Inc. in Manila, said Monday.

“Smart investors should take advantage of the weakness and accumulate because this is all sentiment-driven," said Rizal’s Palma Gil. “Other than incendiary statements and killings related to the drug war, investors like Duterte’s economic and fiscal policies or at least what has been communicated so far,” he said, adding that he expected the index would go back up to 8,000.

Moody’s Statement

A deadly Sept. 2 bombing in Davao City, Duterte’s hometown, and the president’s subsequent declaration of a “state of lawlessness” pose only a limited credit impact in the near term, Moody’s Investors Service said in a statement released Wednesday.

“If recent events lead to prolonged uncertainty around security or economic policy, such a development would eventually dampen business confidence and consequently, economic outcomes,” Moody’s said in the statement. Duterte’s “increasingly controversial law and order policies could exact an opportunity cost for reform.”

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