Photographer: Taylor Weidman/Bloomberg

Asia's Worst Emerging Stocks Are Finding Some Support

  • Manila stocks drop 10% in quarter, most in world after Ghana
  • Deutsche Asset, Nomura and HSBC see buying opportunities

Philippines stocks are getting some forgiveness.

Even though the Philippine Stock Exchange Index is on course for its worst quarter since 2008 as lofty valuations and the anti-U.S. outbursts of President Rodrigo Duterte amplify a broader emerging-market selloff, Deutsche Asset Management and Nomura Holdings Inc. are betting on a revival.

“The Philippines will be a very good opportunity next year," said Sean Taylor, the Hong Kong-based chief investment officer for Asia Pacific at Deutsche Asset, who upgraded emerging markets to neutral early in 2016 for the first time in three years. “The underlying economy is in very good health and that’s now coming into companies."

The benchmark equities gauge is down 10 percent since the end of September, the biggest drop in local-currency terms after Ghana among around 100 indexes tracked by Bloomberg, as foreign funds pulled $526 million from the market. Even a forecast-beating third-quarter economic growth reading of 7.1 percent, the fastest in Southeast Asia, wasn’t enough to stem the rout.

The Philippine gauge closed down 1.1 percent on Thursday and the peso weakened 0.4 percent against the dollar after the Federal Reserve raised interest rates and flagged a faster pace of increases next year.

Deutsche Asset is slightly overweight the Philippines, although it’s less easy to trade than many of its peers because of a lack of liquidity, said Taylor.

Nomura restored its overweight call in late October on the assumption the market was focusing too much on political risks as Duterte pivoted toward China and ignoring the strong economic fundamentals, said Mixo Das, the lender’s Singapore-based equity strategist. Infrastructure spending will support the economy next year and it’s possible the stock index could test its 2016 high, he said. That would imply a 18 percent increase from Thursday’s close.

“Most of the Philippines underperformance has come in before Trump” won the American election, said Das. “If anything, I would expect that the Philippine-U.S. relationship could actually be better under a Trump presidency.”

Peso, Valuations

The peso has held up relatively well compared with its peers. The Philippine currency has weakened 2.9 percent against the dollar this quarter, less than declines of 3 percent for the Thai baht and 7.4 percent for Malaysia’s ringgit.

Not everyone sees a turnaround though. Geopolitical uncertainty, both domestic and abroad, will probably limit foreign participation and further de-rating can’t be ruled out, Morgan Stanley Singapore-based analysts Sean Gardiner and Aarti Shah said in a Dec. 6 research note as they double downgraded the nation’s equities to underweight from overweight.

Philippine stocks appear “highly vulnerable” to a more rapid pace of interest-rate increases by the Fed and are likely to continue to lag behind the rest of Asia, Credit Suisse Group AG said in a note released Thursday in which it maintained an underweight call. The country’s equities have the most negative correlation with the U.S. 10-year bond yield in the region due to relatively high levels of foreign ownership, the lender said.

The decline in Philippine stocks, which have long been some of the most expensive developing-nation equities, has pushed the index’s 12-month price-to-earnings ratio to 16.3 from as high as 19.6 in July. The valuation premium over the MSCI Emerging Markets Index has fallen to 1.3 from 2 in 2013.

The high valuations are the main reason the Philippine gauge dropped faster than its peers amid prospects for more rapid U.S. interest-rate increases, said Herald van der Linde, the head of equity strategy for Asia Pacific at HSBC Holdings Plc in Hong Kong. Valuations look more reasonable now and the country’s stock index will rise to 9,100 by the end of 2017, 33 percent higher than now, he said. HSBC remains overweight Philippine stocks and likes real estate companies and some banks, van der Linde said.

“It’s a market where the balance of payments looks very healthy and most of the growth is not driven by trade but by domestic dynamics,” he said. “Our outlook remains quite positive. Structurally, the story remains still pretty good."

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