Philippine Stock Exchange Index now Asia's most expensive in what is seen as an Aquino-led rally
THE world's biggest equity bull market is propelling Philippine valuations to all-time highs as international investors pile into the country's stocks in an endorsement of President Benigno Aquino's economic policies.
The Philippine Stock Exchange Index climbed 13 per cent this year till yesterday, bringing gains since October 2008 to 285 per cent, at least 124 percentage points more than every other bull market in emerging and developed nations, according to data compiled by Bloomberg. The index turned into Asia's most expensive from the second-cheapest four years ago as rallies in Ayala Land Inc and Bank of the Philippine Islands lifted the gauge to 19 times estimated profits.
Aquino's efforts to boost spending on government projects and tackle corruption are convincing foreign investors to look past the nation's speculative-grade credit rating and focus on the third-fastest growth in Asia after China and Thailand. While Invesco Ltd says shares are too expensive, Samsung Asset Management and Religare Capital Markets see further gains of at least 20 per cent and an investment-grade ranking this year.
"Funds will remain net buyers," Alan Richardson, who helps oversee about US$110 billion as a money manager at Samsung Asset in Singapore, said in a Feb 6 email. "The focus is on opportunity and growth rather than contraction caused by deleveraging, bank recapitalisation, fiscal austerity and increased regulatory oversight in many of the developed economies."
The benchmark gauge for the nation's US$236 billion equity market rose 0.9 per cent, the biggest gain in Asia today, to a record 6,620.72. The bull market, defined as an advance of at least 20 per cent from the most recent low without a drop of the same magnitude on a closing basis, is the biggest since Bloomberg began compiling Philippine index data in 1987.
Mexico's IPC Index has climbed about 161 per cent since March 2009, making it the second-biggest bull market among 45 emerging and advanced countries, while the Standard & Poor's 500 Index is up 125 per cent from a low in the same month. In China, the biggest emerging market, the Shanghai Composite Index has increased 24 per cent from its Dec 3 low.
Philippine shares will probably return about 38 per cent by the end of 2014, according to Samsung's Mr Richardson. The benchmark index may rally 20 to 30 per cent this year, said John Sturmey, head of equity capital markets at Religare Capital Markets, a unit of New Delhi-based Religare Enterprises Ltd.
"We are very bullish on the Philippines for this year and the following years," Mr Sturmey said in a Feb 5 interview in Manila.
Foreign investors purchased a net US$819 million worth of shares in Asia's 12th-biggest stock market this year, 120 per cent more than during the same period a year ago, according to Philippine Stock Exchange data compiled by Bloomberg. The nation of about 100 million people recorded US$2.5 billion of inflows last year, the most since Bloomberg began tracking the data in 2000.
Growing confidence in the economy is also boosting the nation's currency and debt. The peso has appreciated 5 per cent against the dollar during the past 12 months, the most in emerging markets, and reached the strongest level since 2008 last month at 40.55 to the dollar.
Yields on local-currency debt, rated BB+ by Standard & Poor's, fell to a record 3.76 per cent on Jan 28, according to the JPMorgan GBI-EM Philippines Index. The cost to insure government bonds, rated one level below investment grade, against non-payment for five years using credit-default swaps was 103 basis points yesterday, data compiled by Bloomberg show. That compares with 121 for Brazil, whose foreign-currency debt is rated two levels above the Philippines.
Philippine gross domestic product increased 6.8 per cent from a year earlier in the fourth quarter, compared with 7.9 per cent in China. The euro region contracted during the period, while the US expanded 1.5 per cent.
Mr Aquino plans to boost spending to a record and seek more than US$17 billion of infrastructure investments to spur growth of at least 6 per cent this year. Projects to build a toll-road south of Manila and more than 9,300 classrooms have already been announced since he took office in June 2010.
The 53-year-old president has narrowed the budget deficit by cracking down on tax evasion and raising taxes on liquor and tobacco. The gap was probably 2.3 per cent of GDP in 2012, Budget Secretary Butch Abad said in a Feb 14 interview in Manila. That's down from 3.5 per cent in 2010, according to Philippine Department of Finance data.
Mr Aquino, who had a 66 per cent approval rating in a January survey conducted by Pulse Asia, has also focused on reducing corruption. Renato Corona, the country's top judge, was ousted in May for illegally concealing his wealth.
The Philippines was ranked 105 on Transparency International's 2012 Corruption Perceptions Index, an improvement from 134 in 2010. (A lower ranking signals less corruption.)
"The macro environment looks very positive and the Philippines probably has the cleanest government in its history," Alistair Thompson, deputy head of Asia Pacific ex- Japan equities at First State Investments in Singapore, said in a Jan 16 phone interview. "Companies are very optimistic." His firm oversees about US$147 billion.
Philippine stock valuations already reflect the good news, according to Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco, which oversees about US$713 billion.
The benchmark index's valuation of 19 times projected 12-month earnings is the highest since Bloomberg began compiling the data in January 2006 and 46 per cent more expensive than the MSCI All-Country World Index. The Philippine gauge has the world's second-highest multiple after Greece's ASE Index, which trades at 22 times estimated profits, the data show.
Ayala Land, a Manila-based developer, is valued at 39 times 2013 profit forecasts, more than twice the median multiple for global peers, according to the average of 14 projections compiled by Bloomberg.
Bank of the Philippine Islands, the country's biggest lender by market capitalisation, trades for four times net assets, versus the 1.6 industry average.
Earnings-per-share in the Philippine index will probably increase 14 per cent in the next 12 months, versus 25 per cent for the MSCI All-Country gauge, according to analyst estimates compiled by Bloomberg.
"The Philippines is a very crowded market," Invesco's Mr Chan said in a Feb 7 phone interview. He cut Philippine positions to less than 1 per cent of total holdings from "much higher" levels last year and prefers shares in China and South Korea, where price-earnings ratios are about half the level of the South-east Asian nation's.
There is "probably room" for Philippine stock valuations to climb as long as growth in earnings and the economy can be sustained, Hans Sicat, president of the country's bourse, said in a Feb 15 interview in Tokyo.
First State's Mr Thompson said he purchased shares of Manila-based BDO Unibank Inc after visiting the country in November. The nation's second-biggest bank by market value trades for 2.2 times net assets, about half the multiple of Bank of the Philippine Islands.
"We remain positive," Douglas Cairns, an investment specialist for Asia and emerging-market equities at Threadneedle Investments in London, which oversees about US$122 billion, said in an email on Feb 7. Mr Cairns said the firm has overweight holdings in Philippine shares, meaning positions exceed the country's representation in benchmark indexes.
An investment-grade credit rating may open Philippine capital markets to pension funds and endowments that have avoided the country, according to Samsung Asset's Mr Richardson.
The rating will probably be upgraded in the first half, central bank Governor Amando Tetangco said in a Bloomberg Television interview on Jan 25. S&P raised its outlook to positive from stable on Dec 20, citing the stability of Mr Aquino's administration and economic growth. GDP will probably increase 6 to 7 per cent this year and accelerate in 2014, Economic Planning Secretary Arsenio Balisacan said at a forum in Manila on Feb 13.
Investors should add to their stock holdings on any declines, Christopher Wood, a Hong Kong-based strategist at CLSA Asia-Pacific Markets who recommends a bigger overweight position in the Philippines than any other equity market in Asia excluding Japan, said in a Feb. 7 report. "In such a structural bull market, those investors who focus too much on valuations sell way too early." - Bloomberg