Philippine Equities Cheapest in Two Years as Growth Belies Rout

Philippine stocks are proving too

cheap to pass up for two of the nation’s biggest money managers

after falling the most since 2011, as companies post record

profits and economic growth outpaces the world.

The equity market was among the hardest hit in Asia as

global shares lost $2.4 trillion since Federal Reserve Chairman
Ben S. Bernanke said on May 22 that the central bank could

consider paring stimulus should the employment outlook show

sustainable improvement. The Philippine Stock Exchange Index (PCOMP) has

dropped 12 percent from a May 15 record and now has an earnings

yield of 5.2 percent, versus the 3.4 percent average on the

nation’s debt. The last time the gap was this wide, in September

2011, the index rose 31 percent in six months.

BDO Unibank Inc. (BDO) and Metropolitan Bank Trust Co. (MBT) say

they’re switching out of bonds to buy equities. The economy

expanded at a faster-than-estimated 7.8 percent pace in the

first quarter, more than China’s 7.7 percent, and analysts

increased profit forecasts for companies in the benchmark index

to a record. While foreigner investors sold $267 million of

Philippine stocks this month and exports fell in April, BDO says

the gauge will jump as much as 23 percent by next year.

“This correction has opened a very good opportunity,”

said Marvin Fausto, who oversees about $20 billion as the chief

investment officer at BDO, the country’s biggest money manager.

“The idea is to keep buying on this weakness.”

Top Funds

The PSE index, which rose 2.8 percent to 6,518.77

yesterday, will rally to as high as 8,000 next year, Fausto, who

helps run this year’s second- and third-best performing

Philippine stock funds, said in a June 9 phone interview. The

$186 million BDO Institutional Equity Fund and the $267 million
BDO Equity Fund (EPCIBEQ) both returned about 14 percent since the end of

December. That compares with an average gain of 6.7 percent for

32 Philippine equity funds tracked by Bloomberg.

Metropolitan Bank has been buying shares of lenders during

the retreat and has overweight positions on property and

consumer stocks, Allan Yu, a Manila-based vice president who

helps oversee the bank’s $10 billion of assets under management,

said in a June 10 phone interview. Yu and Fausto declined to

name specific stocks they are purchasing.

Casino Operator

Bank of the Philippine Islands, the country’s biggest

lender by market value, has dropped to 17 times estimated

profits from as high as 23 times in February. Bloomberry Resorts

Corp. (BLOOM), a Manila-based casino and hotel operator, has a forward

price-to-earnings multiple of 30, down from 53 in January,

according to data compiled by Bloomberg.

The PSE index has retreated 12 percent since May 22, the

biggest drop among 18 equity gauges in Asia tracked by Bloomberg

after Thailand’s SET Index (SET) and Japan’s Topix. (TPX) The MSCI All-Country World Index slipped 3.2 percent during the same period

as Bernanke’s comments lifted U.S. Treasury yields and reduced

appetite for riskier assets.

Philippine equity valuations are still high relative to

regional peers and data this month cast doubt on the strength of

the country’s economic growth.

The PSE index trades at 18 times projected 12-month

earnings, versus the MSCI Southeast Asia index’s multiple of 14.

The Philippine gauge’s earnings yield of 5.2 percent compares

with 6.8 percent for the regional measure, according to data

compiled by Bloomberg. The 1.6 percentage-point gap is bigger

than the average spread of 0.54 percentage point, or 54 basis

points, during the past three years.

Philippine unemployment increased to 7.5 percent in the

three months through April, the highest level in three years,

the government said on June 11. Exports (PHEXYOY) shrank 12.8 percent in

April, exceeding the 5.3 percent median of 12 estimates in a

Bloomberg survey.

Monetary Policy

Gains in Philippine shares will be limited because the

country’s economic expansion isn’t strong enough to counter

rising interest rates around the world, according to Alan Richardson, a Hong Kong-based money manager at Samsung Asset

Management.

“This will restrain valuation upside,” Richardson, whose

$149 million Samsung Asean Equity Fund (5670800) outperformed 97 percent

of peers tracked by Bloomberg during the past three years, said

in a June 18 interview.

The yield on 10-year U.S. Treasuries (USGG10YR) has climbed more than

20 basis points during the past month, while the rate on the

BofA Merrill Lynch Global Government Index increased 11 basis

points to 1.41 percent. Treasury 10-year note yields were little

changed at 2.18 percent yesterday after climbing five basis

points the previous day on speculation the Fed may indicate when

it will begin slowing bond purchases after a two-day policy

meeting that concludes today.

Bull Market

The Philippine index’s 30-day historical volatility rose to

36 yesterday, the highest level since January 2009. Even after

the slump, the index has advanced 282 percent from its low

during the global financial crisis in October 2008, the biggest

bull-market rally among equity gauges in 45 emerging and

developed countries.

Stocks surged through last month as President Benigno Aquino’s efforts to tackle corruption and increase spending on

government projects boosted investor confidence in the $225

billion economy. The country won its first investment-grade

credit ratings this year and state borrowing costs have halved

from three years ago, according to the BofA Merrill Lynch

Philippines Government Index.

Global Expansion

The economy’s 7.8 percent growth in the first quarter was

the fastest in almost three years, beating all 22 estimates in a

Bloomberg survey of economists. It was the quickest first-quarter expansion among 40 countries tracked by Bloomberg.

The Philippine economy probably will grow 7 percent this

year, compared with a previous estimate of 5.7 percent, Michael Spencer, chief Asia economist at Deutsche Bank AG in Hong Kong,

wrote in a June 17 report. The global economy will expand 2.2

percent, the Washington-based World Bank said in a June 12

report, less than a January forecast of 2.4 percent.

PSE index profits will increase another 6.9 percent to a

record in the next 12 months after climbing 19 percent during

the past year, according to more than 240 analyst estimates

compiled by Bloomberg. That compares with projected growth of

5.1 percent for the MSCI Southeast Asia Index, a gauge of shares

in the Philippines, Indonesia, Malaysia, Thailand and Singapore.

‘Growth Trajectory’

“The fundamentals haven’t changed,” said Metropolitan

Bank’s Yu, who estimates the PSE index will climb about 21

percent during the next 12 months. “The economy is still on a

strong growth trajectory.”

The Philippines has scope to ease monetary policy to

protect growth, central bank Governor Amando Tetangco said in a

Bloomberg Television interview on June 14. Inflation held at a

13-month low of 2.6 percent in May, government data showed.

Higher equity valuations in the Philippines are justified

by the country’s long-term growth prospects, David Gaud, who

helps oversee about $30 billion as a senior portfolio manager at

Edmond de Rothschild Asset Management, said in a June 13 phone

interview from Hong Kong.

Infrastructure Spending

Aquino is seeking more than $17 billion in infrastructure

investments to increase output and create jobs in the nation of

105 million people. Companies from San Miguel Corp. (SMC) to Ayala

Corp. and JG Summit Holdings Inc. (JGS) are bidding for the nation’s

airport and railway projects. Investment in the first quarter

surged 47.7 percent from a year earlier, compared with a 9.5

percent gain in the previous period, according to the

government.

“We are getting to a point where most of the negative news

is priced in” for Philippine stocks, Gaud said. “We are more

comfortable they will recover and you should be able to get a

positive return in the coming six-to-12 months.”

To contact the reporters on this story:
Michael Patterson in Hong Kong at

mpatterson10@bloomberg.net;

Ian Sayson in Manila at

isayson@bloomberg.net;

Weiyi Lim in Singapore at

wlim26@bloomberg.net.

To contact the editor responsible for this story:

Darren Boey at

dboey@bloomberg.net

Philippine Equities Cheapest in Two Years as Growth Belies Rout