Philippine equities a buy despite correction risk

Despite signs of foreign investors pulling out of Philippine equities and the blue-chip index trading at a premium to almost the rest of Asia, positive conviction on the market appears hard to sway.

For the first eight months of this year, foreign investor inflow into the nation’s equities market stands at $2.1 billion. According to Credit Suisse, on a rolling 12-month basis to August 12, net foreign buying as a percentage of market capitalisation reached 1.5%.

This makes the country the most crowded trade in emerging Asia, the bank notes, adding the risk of a correction for the Philippine market is higher when it is overbought by foreign investors (as defined when the percentage of net foreign buying to market cap reaches 1% or higher).

In a recent client note Credit Suisse tipped a switch to Korea as the latter offers bigger discounts than average and is “under-owned” by foreign investors.

But not all investors are seeking an exit: some point to anti-corruption measures under president Benigno Aquino; GDP growth that stood at 6.1% for the first half; and strong fiscal spending into an infrastructure boom. 

Soohai Lim, director of Asian equities at Baring Asset Management (Asia), concedes that while year-to-date the market is “well-bought” by foreigners, the outlook remains quite good and he expects the market to continue trading at a premium to the region.

“We think it’s a compelling story and investors should take exposure,” says Lim. He notes the young population bodes well for growth, with domestic consumption as a percentage of GDP presently standing at 70%.

Earlier this year president Aquino endorsed an anti-corruption plan up to 2016 to promote greater transparency, accountability and public access to information on government projects and spending, laying the groundwork for more participation in a public private partnership (PPP) programme as the government accelerates its budget disbursements in infrastructure.

“We get feedback from onshore corporates that there is a strong positive feeling among them; they can see the government commitment to invest in infrastructure so they come up to bid for PPP projects,” says Lim.

Michael Enriquez, chief investment officer for Sun Life Financial Philippines, says at current price-to-earnings (PE) valuations he does not see the Philippines as expensive even though multiples for some North Asian neighbours are lower.

“I’m not worried about the market valuation being quite high in terms of the blue-chip index PE. As long as earnings can support the high valuations I am okay with that,” says Enriquez.

Based on earnings from the second quarter, he says Philippine corporate growth is still strong: the 30 stocks that make up the blue-chip PSE Composite index average 15% bottom-line growth.

Richie Diaz, head of UBS Philippines client trading and execution, says investors are focusing on consumer, gaming and property sectors in particular, citing Puregold and Ayala Land.

Diaz sees the blue-chip index rising 8.5% to 5,600 points by year-end, from 5,161 at press time. In PE terms, that means investors will be paying 15 times earnings in 2013, from 13.5 times currently.

That perhaps explains why Liquidnet, the agency broker that offers block liquidity to global asset managers, started offering its block-matching service in the Philippines this month – the group’s ninth market in Asia.

The firm’s Asia-Pacific head, Lee Porter, says that 20 of the top 30 holders of Philippine stocks use its service. What Liquidnet can offer is block trading up $1 million in the market. Currently, the average on-exchange trade size is $6,000.

Philippine stocks are also trading at wider spreads compared with other Asian markets, at 80-100bp compared with 20-25bp for others.

But there are downside risks to the market. Diaz says the nation could face a potential sell-off by foreign investors who may switch funds to North Asian markets on better news from Europe.

“The Philippines has been viewed as a safe haven for the most part of this year as financial markets in other parts of Asia were dampened by the unfolding crisis in the eurozone,” he says.

“If the fiscal conditions improve among some of these hard-hit eurozone members, foreign investors might take profit out of the Philippines and switch to more developed, but underperforming, North Asian markets such as South Korea.”