It was a roller-coaster ride for the local stock market in the first quarter, with the main stock barometer slipping into the much-dreaded “bear” territory early on but firming up before the first month was over. By March, the index has strongly rebounded, attracting a fresh new round of net foreign investor inflows, albeit at still modest levels, and reversing losses seen early in the year.
The Philippine Stock Exchange index (PSEi) slid to a low as 6,084 in January but was trading back to the 7,000 to 7,300 levels by March.
Apart from jitters on the Chinese economy and the US Federal Reserve’s prospective interest rate increases this year, concerns about the prolonged slump in oil prices have emerged. For an oil-importing country like the Philippines, the freefall in global oil prices has been like manna from heaven, making fuel prices more affordable for car users, public utilities and airline operators. But the prolonged slump started to worry economists as the oil-producing Middle East had a big concentration of overseas Filipino workers (OFWs) whose remittances were supporting many households in the country.
Locally, political uncertainties ahead of the May 9 elections have likewise escalated. Investors have been generally happy during the term of the Aquino administration, during which the government achieved investment grade rating for the first time. But while Mr. Aquino had tried to frame the presidential race as a referendum for continuity or change, his preferred successor, former Interior Secretary Mar Roxas, fares poorly in surveys. As of press time, the front-runner in the presidential poll survey was unorthodox Davao City Mayor Rodrigo “Digong” Duterte while Ferdinand “Bongbong” Marcos Jr.—namesake of the former strongman who was ousted during the 1986 Edsa Revolution—leads the vice presidential race.
Patrick Cheng, senior vice president and group head for trust and investments at China Bank, which has about P1 billion in assets under management (AUM) via its equity-based unit investment trust fund (UITF), said local stocks have room to climb back further to 7,500 to 7,600 this year, backed by stable domestic growth prospects despite the political noise arising from the upcoming presidential elections. Separately, China Bank has a high dividend-yielding equity-based UITF with AUM of around P300 to P400 million.
When the PSEi moved out of bear territory in end-January, one favorable catalyst was the report about the country’s better-than-expected fourth-quarter domestic economic growth rate of 6.3 percent year-on-year, beating the 6-percent market consensus. For the full-year 2015, gross domestic product (GDP) grew by 5.8 percent.
Nonetheless, Cheng said a lot would depend greatly on the forthcoming elections to be held on May 9, during which the nation will choose President Aquino’s successor. “Everybody wants to see the new agenda and all that,” he said.
But at least for the next six to 12 months or even through the next 15 to 18 months, Cheng said the Philippines would still likely see a steady economic growth rate averaging 6 percent. It was unlikely that the next administration would halt projects that were already mid-way through, he said.
“But beyond that, we need this pipeline of projects so whoever is the new President should better make sure that there’s a pipeline so we can sustain beyond the next 12 months,” Cheng said. “It’s important that the next President pushes the infrastructure agenda quickly so that momentum can continue through 2019.”
Under the Aquino administration, the Philippines kept its quarterly average growth rate of 6 percent, pushing the six-year moving average of real GDP growth at 6.2 percent as of 2015—the highest since 1978.
“Fundamentals are positive, which basically means that we won’t see a contraction of earnings, but valuations are reacting more to liquidity. This means you don’t see fundamental support for the valuations right now, which will give us volatility,” BPI Securities assistant research head Jose Mari Lacson said.
He won’t be surprised if market volatility returns, Lacson said. “Liquidity can go out very fast in the same way that investors in the first quarter were bipolar. But investors have to recognize that nothing has changed except that US supports China, which alleviates currency risk.”
Lacson was referring to the US Federal Reserve’s decision in March to keep US interest rates low, in turn allowing money to go back to China and enabling the latter’s monetary stimuli—particularly the latest reduction in reserve requirements (50 basis points to 17 percent last Feb. 29)—to work its way into the economy.
By March, investors have also scaled down expectations of increases in US Fed rates this 2016 from four to two. As such, Cheng said the foreign exchange market has likewise stabilized, adding that the US Fed was now more sensitive to what was happening globally.
The peso, which closed last year at P47.23 against the dollar, depreciated to P47.51 by end-January and further to P47.64 by end-February before rebounding to P46.72 against the greenback by end-March.
In the case of China, Cheng noted that recent developments have turned out a little bit better. However, if China sharply devalues the yuan anew, he said there could be global market volatility all over again. In August 2015, a surprise devaluation of the yuan triggered a global stock market meltdown.
Lacson said the US-China dynamics remained the wild card. “If China can’t get its economic growth to start again and the Fed comes to a point that it can no longer hold off rate hikes, then we’re going to go back to that cycle again,” he warned.
“The danger here is that the US also has to take care of inflation. They are dovish now but core inflation is moving up. There will be a point that instead of the two rate increases people expect, there may be four. It depends on how fast US core inflation rises. It’s because at the end of the day, the US is just accommodating China,” he added.
If the US Fed tightens, that again will curb the liquidity situation. “But right now, there’s a lot of room for them to keep interest rates low, that’s why the market is bubbling again,” Lacson said, adding that there was otherwise no reason why the local market should trade at 18 times projected earnings.
“The only sector that has a higher justification is the consumer sector because of the election spending,” Lacson said. “That’s why we expect that the money should go there.”
Nonetheless, Lacson said the Philippines’ domestic consumption story was intact. “Domestic factors that drive fundamentals are pretty solid. That’s one factor why you can’t be too bearish on the Philippines—because investors are saying ‘we like you.’”
“Just a month ago, Asian equities were in all sorts of ‘trouble.’ The risk of a Chinese hard landing, a steeper US Fed (US Federal Reserve) rate hike trajectory and a further downside in commodities kept EM (emerging market) Asian markets at elevated volatility and pushed out foreign investments. Now, with some of these fears behind us, even if temporarily, we see renewed confidence building up among FIIs (foreign institutional inflows,” British banking giant HSBC said in an April 4 report written by the team led by Herald van der Linde, HSBC head of equity strategy for Asia Pacific, and Devendra Joshi, HSBC strategist at Asia Pacific.
HSBC is “overweight” on the Philippines along with Indonesia, Singapore and China while it is “underweight” on India, Malaysia, Taiwan and Hong Kong. Overweight is a recommendation to load up on equities in excess of the benchmark, typically the MSCI index, while “underweight” is the opposite.
In March, HSBC estimated that FIIs had purchased Asian equities worth $12.3 billion, the highest monthly inflow seen since September 2013. Most of the inflow went to Taiwan ($4.9 billion), India ($3.4 billion) and Korea ($2.9 billion). Southeast Asia also received a fair share of the equity flows. As a result, HSBC noted that for the first time this 2016, year-to-date flows into Asian markets were positive, with the region receiving $6.6 billion.
In the case of the Philippines, HSBC estimated that FIIs had sold $1.2 billion worth of stocks for the whole of 2015. By January and February 2016, there was still a net outflow from this segment amounting to $40 million and $80 million, respectively, but by March, the segment posted a net inflow of $200 million, resulting in a positive inflow of $80 million for the first quarter.
HSBC said its proprietary data on mutual funds’ positioning showed that amid heightened volatility in February, funds preferred markets with internal drivers like Indonesia and the Philippines and those with exposure to the US recovery like Taiwan and Korea. “Overall, Taiwan remains the most preferred market in Asia and Malaysia the least preferred one. In the current environment, Korea, Indonesia and the Philippines look better placed for high er fund inflows, in our view,” it said.
Consensus estimates indicated that average corporate earnings in the Philippines would likely grow by 11 percent this year, HSBC noted. “We think this will be driven by a recovery in growth in the consumer sector. Fiscal spending is likely to be front-loaded in the first quarter given a spending ban in the months prior to the election. Key is, though, that mutual funds have, for the first time since mid-2011, dipped into underweight territory. Therefore, we argue that this is the time to look at Philippine equities,” the HSBC report said.
For its part, China Bank sees corporate earnings growing by 10-11 percent this year, in line with expectations. Due to the recent rebound in equities, Cheng said local stocks have become more expensive again. “We want to see what the earnings are for the first quarter. And if the growth can be sustained and government spending can be sustained, 7,500 or 7,600 (for the index) is possible,” he said.
BPI Securities’ Lacson agreed that after the fourth-quarter 2015 corporate reporting season, investors were now looking at the first quarter 2016 results, which would all be in by May 15.
In the recently concluded fourth-quarter reporting season, Lacson noted that the only positive surprises were those of the consumer sector, noting that the last quarter was very strong for retailer Robinsons Retail Holdings and the margins were very good for Puregold Price Club.
As such, consumer play is seen remaining intact this year.
One key disappointment for the market was the earnings of telecom giant Philippine Long Distance Telephone Co. “But it was good for the market,” Lacson said, as this had allowed the index to pull back a bit. “When investors moved out of PLDT, they moved to SM Investments and JG Summit, which, without any new expectation, benefited. So it wasn’t really a fundamental-driven increase,” he said.
On the other hand, the aborted alliance between San Miguel Corp. and Australian telecom giant Telstra—seen as a perceived threat to the current telecom duopoly in the Philippines—gave some relief to the telcos.
Overall, sentiment seems to have turned more favorable for Asian emerging markets.
Investment house BofA Merrill Lynch, in a research note dated April 17, said the house view had turned more upbeat on emerging markets. It said it was “time to get out of the bunker, and off the fence.”
“We are reversing our five-year bearish views on Asia and emerging markets (EMs). While we made a tactically bullish call at end-February, we now believe investors should make a longer-term bullish commitment to both Asia ex-Japan and EM equities,” Merrill Lynch said.
To start with, BofA Merrill Lynch said currencies had re-priced, which it said would matter for margins and markets. “Even more important than potential US dollar stability/reversal is how competitive Asia/EM currencies have become,” Merrill Lynch said, noting that about 40 percent of the 23 EMs it was tracking had seen currencies dropping to their most competitive quartile this year. “Collectively, this breadth of competitiveness for EMs doesn’t get much better than this. Normally, a financial crisis is the cosmic signal to exuberant countries to rein in their excesses and hubris, cut back their mal-investment and devalue their currencies. Cutting off access to capital and making it more expensive is part of this detoxification process, and often some debt forgiveness/rescheduling is involved as a palliative. Emerging markets have been used to this process since 1820,” it said.
At the same time, Merrill Lynch said China’s monetary policy was gaining traction, which it said should be a key driver of Asia/EM equities. In last year’s China bubble, when Chinese policy was tightening while the Chinese market was levitating, Merrill Lynch had made the exact opposite bearish argument. “So, heed the power of Chinese monetary easing—a proxy for demand—and we would get bullish. Monetary policy in China is working exactly as it should —by boosting property prices,” it said.
Merrill Lynch is overweight on Russia, Turkey, Taiwan, China, Indonesia and Chile.
Citigroup, in an April global strategy and macroeconomic research dated April 18, said that after a tough few months, global market volatility looked to be subsiding. While global growth remains elusive, it said at least deflation risks appeared to be diminishing.
“After what was a very challenging first quarter of 2016, we are seeing a repeat of what seems to have become a seasonal trend to lower forecasts. There is probably scope for some of the data to come out a little better, in the coming months, than what appear to be rather subdued expectations,” it said. If this is the case, Citi said risk assets would likely maintain their somewhat better tone, noting, however, that it was hard to envisage a major move higher unless there’s stronger global growth.
“We think that the most important issue for markets over the next few months is going to be the level of growth relative to expectations, rather than the level of growth per se. The underlying trends in the data have not been particularly volatile; it is the expectations that have been moving. And while a reduced risk of deflation is to be welcomed, the numbers are hardly strong enough to re-ignite tightening fears just yet. There has been a strong seasonal tendency, over the past few years, for expectations to get revised down through the winter months, only to be surpassed over the summer. It looks as if this might be happening again.”