Biggest Philippine Pension Fund Sees 9% Stocks Rally

The Philippines’ benchmark stock index will advance about 9 percent in the next 12 months as Asia’s fastest economic expansion and record-low interest rates boost earnings, according to the country’s biggest pension fund.

The Philippine Stock Exchange Index, which is down 11 percent from a record 7,392.20 on May 15, may climb to 7,200 from yesterday’s close of 6,583.55, Robert Vergara, president of the Government Service Insurance System, said in an interview in Manila yesterday. The fund, which manages about 725 billion pesos ($16.7 billion) for more than 1.4 million state workers, will add to its 16.5 percent weighting in equities should the PSE index drop below 6,000, Vergara said. The gauge fell 0.5 percent to 6,553.21 at 11:45 a.m. in Manila.

Earnings will increase about 15 percent during the next two years as the economy expands 6 percent to 7 percent and low borrowing costs fuel consumer spending, he said. The PSE index has declined since May as speculation the U.S. Federal Reserve will reduce monetary stimulus spurred capital flight from emerging markets. Foreign investors sold a net $241 million of Philippine shares last month, the most since 2008, data compiled by Bloomberg show.

“My view for the outlook of the Philippines is still very robust,” Vergara said. “If the market gives us the opportunity we will put more into equities. It’s not unusual for stocks to overshoot, as we have seen earlier this year.”

The PSE index is valued at 18 times analysts’ earnings estimates for the next 12 months, according to data compiled by Bloomberg. While that’s an 80 percent premium over the MSCI Emerging Markets Index, the Philippine measure’s multiple has dropped from a record 21 in May.

Relative Yields

Vergara said the fund would consider increasing equity holdings to as much as 20 percent of total assets if the gauge falls below the 5,500 level. He favors banks, construction and property firms, consumer companies and casinos. He didn’t identify any specific stocks.

The PSE index’s 30-day historical volatility rose to 45.3 on July 8, the highest level since December 2008, according to data compiled by Bloomberg.

Philippine shares will outperform the nation’s bonds, Vergara said. The BofA Merrill Lynch Philippines Government Index of sovereign debt has a yield of 3.5 percent after returning 10 percent this year. That compares with the 5.5 percent estimated earnings yield on the PSE Index, data compiled by Bloomberg show.

BDO Unibank Inc. and Metropolitan Bank & Trust Co., two of the nation’s biggest money managers, said in interviews last month they were switching out of bonds to buy stocks.

Dream Economy

The Philippine economy expanded 7.8 percent in the first quarter from a year earlier, outpacing China’s 7.7 percent pace. The central bank has kept its benchmark overnight borrowing rate at a record low 3.5 percent since October 2012 and reduced the rate on special deposit accounts three times this year to 2 percent.

The country “is still experiencing a secular growth story,” Vergara said. “We have the kind of economy that every country dreams of.”

Philippine shares are expensive and investors may move money out of Southeast Asian equities into cheaper markets, including China and South Korea, Catherine Yeung, an investment director for equities at Fidelity Worldwide Investment in Hong Kong, said in a telephone interview July 11.

The PSE index’s forward price-to-earnings ratio of 18 compares with 6.6 for the Hang Seng China Enterprises Index and 8.7 for South Korea’s Kospi, according to data compiled by Bloomberg.

Market Impact

GSIS is targeting annual returns of about 8.5 percent from its investments to provide retirement, life insurance and health-care benefits to government workers. It has about 46 percent of its holdings in fixed income and 4 percent in real estate, Vergara said.

The fund may consider boosting overseas holdings next year in part because the growing size of its investments makes it difficult to trade local shares without moving prices, Vergara said. He’s “excited” about the U.S. equity market as housing prices recover, unemployment falls and rising energy output makes the world’s largest economy more competitive.

The fund liquidated a $670 million global investment portfolio managed by Newport Beach, California-based Pacific Investment Management Co. and Amundi, a Luxembourg-based asset manager, in 2011 after returns fell below target. GSIS started a global investment program in 2008 to diversify its holdings.

“The simple truth is that we’re getting very, very big,” Vergara said. “Investing in the market without having price impact is becoming more and more difficult.”

Before it's here, it's on the Bloomberg Terminal.