Philippine Stock Market Board (Photo credit: Katrina.Tuliao)Financial IQ Philippines Quick Hit(s):
Improving investor sentiments can directly be seen on how the PSE market is performing, which has been going up since start of calendar year.
The Philippine stock market is making its mark as one of the hottest emerging markets in the world, having outperformed many of its regional rivals this year on the back of rosier macroeconomic fundamentals, a resilient corporate sector as well as government’s resolve in stamping out corruption.
An improved fiscal situation, a growing middle class, stabilizing political situation and vast natural resources have likewise brought the Philippines back on the radar of foreign investors.
The government’s commitment to economic and financial reforms and pumped-up infrastructure spending has galvanized new investor interest, sending the main stock barometer to unprecedented heights.
In the first half of the year, the Philippine Stock Exchange index (PSEi) vaulted to new all-time highs 19 times, rising 20 percent to close at 5,246.41 by the end of June. Last July 5, the PSEi shot to a new record high of 5,369.98.
The Philippines has been the darling of many emerging-market fund managers with the local stock market attracting P71.12 billion in net foreign buying in the first half of the year. This was nearly five times bigger than the P14.75 billion recorded the previous year-period.
The PSEi has gained around 25 percent this year, making it the top performing market in Asia, outpacing bourses in Singapore, Indonesia, Malaysia, Thailand, Vietnam, Hong Kong, India and China, among others.
“Just like our main index, investor confidence in Philippines Inc. is at an all-time high. What’s remarkable is that we have been able to achieve unprecedented growth even in the midst of ongoing uncertainties in the Western hemisphere and a cooling Chinese economy. This is a testament to the effectiveness of the reforms that the country has undertaken, which further contributed to the stable macroeconomic environment,” PSE president and chief executive officer Hans B. Sicat said.
In contrast to the economic slowdown in other countries, the Philippine economy grew at a robust pace, backed by a recovery in manufacturing and services.
After wallowing in debt for years, the Philippines, is now a net creditor, having built a solid cushion of foreign exchange reserves.
The country’s improving image got a further boost after ratings agency Standard & Poor’s raised the Philippines’ long-term foreign currency rating to BB+ or just a notch below investment grade.
Long-term foreign currency rating is one of the guides used by global pension funds and other large investors in making investment decisions, such as whether or not to buy the country’s debt or do business in a country.
The combined market capitalization of corporations listed on the PSE rose 12.8 percent to P10.05 trillion while total value turnover jumped 43.2 percent to P947.73 billion.
All indices were in the green, with the financial services index leading the pack, rallying 34.6 percent. The next best performer was the property index which climbed 30.1 percent.
The holding firms index also went up 28.1 percent while the industrial index was higher by 10.8 percent.
After a sharp rally, local stocks have gotten costly compared to other Asian stocks, making some investors reluctant to stick around.
The PSEi, trading at nearly 16 times projected annual earnings or nearly double South Korea’s 8.3 times, is now showing signs of topping out. It is now down by more than four percent from a record reached earlier this month as the euro zone’s debt crisis has worsened.
The Philippine peso, which surged as much as 4.6 percent this year against the US dollar, has also faltered.
For most stock market investors, the price/earnings ratio or P/E is the single most important gauge in valuing a company. If a stock has a P/E of 15, that means the market is willing to pay 15 times its earnings for the stock.
Historically, investors pay around 15 times the amount of money a company makes.
Companies with strong growth potential will have a higher P/E because investors are willing to pay a premium for future profits.
“Moving forward, valuations will remain a top concern amongst portfolio managers, magnified by the approach of the 2Q 2012 earnings season. If the momentum of the first quarter’s 24 percent earnings growth carries over to the next, the advance in share prices may be justified,” said Jun Calaycay of Accord Capital Equities Inc.
“Concerns over slower earnings, as is the case in the US and other western markets, may create some room for price adjustments in the opposite direction to bring the multiples in line with the fundamental values. The alternative of course is that the fundamentals have a lot of catching up to do to justify the general advance in share prices,” Calaycay added.
Analysts believe that the pace of US recovery, China’s slowing economy, the continued weakness in the euro zone, global liquidity tightening, the prolonged conflict in the Middle East and surging fuel prices will continue to weigh on investor sentiment.
Dutch financial giant ING, on the other hand, remains bullish on the Philippines’ prospects, paying attention to property and main index stocks as well as the peso and fixed-income instruments.
Bank of America-Merrill Lynch also continues to see the Philippine stock market as a safe investment haven given the country’s robust economy aided by strong consumer spending.
“Indonesia and the Philippines have very strong domestic consumption so it’s a multi-year story. It’s a favorite area. How long it will last - there would be probably a rotation. Previous analyses show that every time developed markets are weak, ASEAN especially - those with strong domestic consumption - will outperform,” Merill Lynch Asia Pacific investment strategist Victoria Ip earlier said.
The Philippines has one of the youngest populations among all emerging markets, fueling domestic consumption.
For the rest of the year, Merrill Lynch expects the BSP to keep its policy rates steady despite the easing inflation.
The central bank earlier hinted at its readiness to tweak policy rates at any sign inflationary pressures threaten to push the numbers outside the target band.
“If the economy continues to pull a surprise and inflation stays within programmed range, there may be room to tweak rates. To a large part, any adjustments made will be focused on keeping the currency’s value rather than inducing growth or taming inflation,” Calaycay said.
“The peso has been gaining against the greenback and any further strength may threaten the export segment’s income and thus its contribution to overall national income. It’s a tough balancing act for the authorities, particularly in light of a general bias for easing amongst our neighbors,” Calaycay pointed out.
Corporate results for the first half of the year are expected to be good, reflecting the positive economic growth conditions across sectors.
First Metro Investments Corp. expects that second quarter earnings results could improve market valuation further. “The surprise in first quarter GDP will lead to earnings upgrades for most listed companies. Robust economic and earnings reports should provide support to the local market,” FMIC said.
FMIC sees the local market treading lower in the next three months and has advised investors to move to underweight in equities.
“Looking into the third quarter, we see a softer Philippine equities market slowed down by headwinds of weak US economic numbers and a long drawn resolution of the EU crisis. There is also the phenomenon of fund managers taking their vacations during the quarteras well as the dreaded “hungry ghost month” in East Asia,”FMIC said.
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