Despite emerging valuation concerns, the main Philippine stock index is seen reaching new highs, likely to hit 6,500 by the end of this year, given ample liquidity in the market and improved risk appetite, online stock brokerage COL Financial said.
In a Jan. 11, 2013, research note, a COL research team led by company research head April Lee-Tan said the two major drivers of the global stock rally seen today were liquidity and improving risk appetite as central banks around the world simultaneously eased monetary policies last year. But while the uptrend would likely continue, the research team said “it (2013) would be a very volatile year,” considering that several developed economies were still in a fragile situation.
It said key global concerns that negatively affected the appetite for stocks had been resolved, resulting in an improved risk appetite: Greece did not exit the eurozone and instead received much-needed funds to escape bankruptcy; there is less risk that highly leveraged countries such as Spain and Italy would encounter problems refinancing their debts; the United States was able to avert a fiscal cliff; and the Chinese economy started to show signs of bottoming out.
“Similar to global markets, our local market benefited from ample liquidity and improving risk appetite. Although the fundamentals of the Philippines are far better compared to those of developed economies, making us a compelling buy for foreign investors, nothing has changed to prompt a further upgrade in our view of the economy or to justify the recent surge in the market,” the group said in the research note.
It said the country’s favorable economic outlook was already priced in, with the PSEi already trading at 17x forward-looking price to earnings (P/E)—the upper end of its historical range—and is also trading at a premium relative to its global peers.
A P/E ratio of 17x means investors are paying 17 times the amount of money they expect to make from the market.
“Although the absence of positive surprises and the expensive valuations make it difficult to justify a continuous increase in share prices under normal circumstances, we realize that, presently, the more relevant question is whether liquidity conditions will remain favorable as this would determine whether this liquidity-driven rally is sustainable,” according to the COL research note.
“Based on our analysis, liquidity will be here to stay at least for 2013 as there is no reason for interest rates to go up given the benign inflation, the fragile economic condition of developed countries, and the BSP’s (Bangko Sentral ng Pilipinas) focus on preventing a sharp appreciation of the peso,” she said.
COL Financial’s yearend target of 6,500 for the Philippine Stock Exchange index, an upgrade from its earlier forecast of 6,100, implied a P/E of 18.3x. Although this was already very high based on the PSEi’s historical trading range, it said the implied earning yield of 5.5 percent was still above the yields of some of the most popular investment vehicles, namely: time deposits (2-3 percent), special deposit accounts, or SDAs (3.5 percent) and the 10-year T-bonds (4.4 percent).
MANILA, Philippines–A unit of Gokongwei-led conglomerate JG Summit Holdings has raised $750 million from the sale of long-term offshore debt, making history for executing the largest overseas corporate debt deal out of the Philippines.
Wholly-owned subsidiary JGSH Philippines Ltd. issued 10-year senior debt at 4.375 percent per annum.
The debt issue was upsized from original offer size of $500 million due to strong demand. The order book reached $6.6 billion, said Wick Veloso, chief executive officer of HSBC Philippines which is one of the issue arrangers.
“JG Summit is a credit that the market wants an exposure to and this is best shown by the overwhelming demand and tight pricing,” Veloso said.
“This is the largest Philippine corporate offshore issuance so far,” he said.
The JG group last week mandated HSBC, Citigroup Global Markets Ltd. and Credit Suisse Securities (Europe) Ltd. as joint bookrunners and joint lead managers for this issue.
Local stocks are seen attempting to climb new heights this week after the main index broke past 5,100 last week but many issues are becoming more vulnerable to profit-taking.
Last week, the main-share Philippine Stock Exchange index gained 1.44 percent to close at a new record high of 6,139.21. A new intraday peak of 6,150.62 was also established.
Banco de Oro Unibank chief strategist Jonathan Ravelas said the stock market was buoyed by strong investor sentiment that, in turn, was supported by strong macroeconomic fundamentals. “Local investors are discounting the market valuations and just focusing on the growth story of the country,” he said.
At current levels, Ravelas said the market still had some momentum to try 6,200-6,300 in the near term. “However, bear in mind that the market is already in an overbought state. Failure of the market to try these levels could call for further losses toward the 5,800-5,850 levels,” he said.—Doris C. Dumlao
The long-awaited merger of Philippine National Bank and Allied Banking Corp. will finally push through on Feb. 9, the PNB said in a disclosure on Tuesday, Jan. 22, 2013.
The long-awaited merger of Philippine National Bank (PNB) and Allied Banking Corp. will finally push through on Feb. 9, nearly four years after plans were first made public.
In a disclosure on Tuesday, PNB said its board had approved the effective date of the merger with its smaller sister bank on “Feb. 9 in accordance with Article 1.2 of the Amended Plan of Merger.”
Allied Bank’s own board has yet to approve the date of merger.
The PNB board approved the date of merger during a special meeting Tuesday.
Both banks, led by tycoon Lucio Tan, had already secured the remaining foreign and local regulatory approvals required for the transaction to push through.
Last week, the Financial Services Authority of the United Kingdom approved the change in control of Allied Bank Philippines (UK) Plc and PNB (Europe) Plc, paving the way for the upcoming merger of their parent banks.
Also, the Securities and Exchange Commission (SEC) approved the merger and the corresponding amendment to Philippine National Bank’s bylaws reclassifying PNB’s authorized preferred shares into common shares and increasing the number of directors to 15 from 11.
Once the merger takes place, PNB will be the surviving entity and become the country’s fourth-largest private bank, generating more than P1 billion in yearly cost savings.
Full integration would likely take place 18 months after first executing the merger, according to analysts.
The combined entity will have a distribution network of over 650 branches nationwide and total assets of over P514 billion.
It will maintain a presence throughout the Asia-Pacific region, apart from Europe, the Middle East and North America. PNB also aims to regain leadership in the remittance business.
As part of the consolidation, all the issued and outstanding common shares of Allied Bank will be converted to common shares of PNB at a ratio of 130 PNB common shares for each Allied Bank common share.
All the issued and outstanding preferred stocks of Allied Bank will also be converted to PNB common shares at a ratio of 22.763 PNB common shares for each issued Allied Bank preferred share.
Local share prices may test record highs again this week despite the lack of any scheduled economic news to drive momentum from local investors.
Fund managers are instead expected to take their cue from news abroad, bolstered by the general optimism over the domestic economy.
The main Philippine Stock Exchange index (PSEi) ended the week at 6,167, up 0.46 percent week on week and just 4 points short of its highest close of 6,171.70.
Brokerage firm AB Capital said news from the United States, particularly on rosy corporate earnings and favorable legislation on the debt ceiling overshadowed the downbeat tone of the International Monetary Fund (IMF).
The IMF reduced its global growth forecast to 3.5 percent from 3.6 percent. It also expected the European region to contract due to the looming debt crisis.
“US corporate earnings, which came in better than expected, provided a breather to the IMF’s outlook,” AB Capital said. “At home, local investors also kept in mind the recent meeting of the BSP.”
The central bank maintained overnight borrowing and lending rates at 3.5 percent and 5.5 percent, respectively. Special deposit account (SDA) rates, however, were trimmed to 3 percent from 3.65 percent across all maturities.
“While there are no scheduled local economic data to be released [this] week, investors will hinge trades on overseas developments. On the technical side, we see the index testing 6,200,” the firm said.
“Breaking this level would be challenging given the divergence of momentum indicators. Support and resistance levels are at 6,100 and 6,200, respectively,” it added.
In a separate report, analysts from Accord Capital said the expected strong performance of the Philippine economy continued to fuel optimism among local investors.
“If the 2012 performance alone is the backdrop, the outlook for 2013 proves compelling to take on risks,” Accord Capital said, adding that the year-to-date GDP growth at the end of the third quarter already exceeded the government’s full-year target.
“This despite below-programmed spending marked by a slow rollout of the centerpiece PPP scheme and weak exports,” it added.
Alcorn Petroleum Resources Corp., Trans-Asia Oil and Energy Development Corp. and Philex Mining Corp. are three of several stocks that went into active market play, cornering a significant amount of retail investors’ money.
These three issues are now also the subject of animated discussions on whether any of them is actually riding on a “sucker’s rally.”
A sucker’s rally is a phrase used to describe the steady but temporary rise in the price of a stock or market. This happens when a stock’s price or market goes up, even though the rise is not supported by the fundamentals that actually affect the price of a similar stock or market. As such, said stock or market will falter and fall in no time.
It may also be explained in the following way: “The rally may continue just long enough for the ‘suckers’ to get on board, after which the market or specific stock falls.”
The case of APM is amazing. A speculative stock by any measure, it has undeniably brought in record-breaking amounts of money that bolstered both total daily and weekly market value turnover in recent times.
It also afforded investment returns not seen for a long time. For this, APM became, and remains to be, a strong trading and investment player in the market.
On June 29, 2012, APM was just doing P0.016 apiece. By December 28, 2012, it was way up at P0.145 a share, registering one of the most spectacular stock plays that yielded an investment return equivalent to what is called an “eight bagger” (rising in market price eight times over its original price of P0.016 a share).
On Jan. 4 this year, APM fell by 3.45 percent at P0.14 a share. Amazingly last Jan. 25, APM retook lost ground, closing at P0.157 a share. This makes APM only 7.10 percent away from its 42-week high of P0.169, and about 1,121.43 percent away from its 52-week low of P0.014.
Said market play happened, and continues to happen, because APM would become the holding company of businessman Lucio Co, the man behind the successful S&R Membership Shopping and the equally successful Puregold Price Club Inc.
Philex Mining Corp. (PX) is a “first line or blue chip” stock known for its strong track record in improving stockholders’ value as a result of its long record of profitability, good management and dividend-paying record.
After being counted out of the play by the market since the voluntary suspension of its Padcal mine in August last year, PX shares have jumped back to life.
On June 29, 2012, PX was trading at P27.85 apiece. By December 28, 2012, the market price of PX fell to P14.98 apiece.
This stemmed from the leak sustained by the tailing pond of PX in Itogon, Mountain Province. As a result, the company is confronted with the indefinite suspension of its operating permit, including the imposition of over a P1 billion in penalty.
This year, its share price climbed back. Last Jan. 11, it closed at P16.72 a share.
Trans-Asia Oil and Energy Corp. (TA) is a company whose revenue portfolio on power generation and supply, in addition to its mining and oil assets, appears to be promising.
TA’s power generation subsidiaries include South Luzon Thermal Energy Corp. (SLTEC), Trans-Asia Power Generation Corp. and CIP II Power Corp.
Its renewable energy subsidiaries are Trans-Asia Renewable Energy Corp. and Maibarara Geothermal Inc.
TA’s revenue portfolio is augmented by being a licensed Retail Electricity Supplier (RES) and a licensed Wholesale Aggregator (WG).
Based on its general plan, TA is set “to double its power capacity to 400 MW in the next few years.”
TA will also pursue a parallel program on its original business oil and gas exploration. At present, the company has minority participating interests in Service Contract (SC) 6, SC 14, SC 51, SC 55 and SC 69, along with an option to acquire additional participating interest in SC 52.
Also, TA continues to expand its portfolio and customer base at the Wholesale Electricity Spot Market (WESM) since 2007.
Just last November 2012, TA raised some P1.6 billion through a rights offering at an offer price equal to the company’s par value. This was to bolster its financial muscle to pursue growth plans.
Long aware of the rights issue, a sizable part of it ended up in the hands of a group of market makers now said to be behind the 40 percent rise in TA’s stock price since the offering.
Accordingly, the rights issue will be used for equity investments “in several power projects” that will include investments in “those power assets being offered for sale by the state-run Power Sector Assets and Liabilities Management Corp. (PSALM).”
The first stage of the company’s expansion plan involves the construction of the following: the P2.8-billion 20-MW Maibarara geothermal power project in Mt. Makiling, which is expected to “go on line by 2013,” and the P12-billion 135-MW coal-fired power facility in Batangas, in partnership with the Ayala Group, which is expected to “become operational by 2014.”
The second stage of TA’s expansion plan involves the “building of a second 135-MW coal-fired unit in Batangas worth P10 billion through SLTEC, the completion of the P13-billion 135-MW coal power plant in northern Mindanao, a second 20-MW unit for the Maibabara geothermal project, in partnership with the Yuchengco Group and the Philippine National Oil Co., costing another P3 billion and the P6.4-billion 54-MW wind power project on Guimaras Island.”
Most observers believe that APM plans to hold a follow-on offering in the first quarter. This will challenge its present pricing. Also, the current predicament of PX is intolerable. It’s a setback to its future. The fruits of TA’s plans, on the other hand, are yet far from being felt.
MANILA, Philippines—The local stock market closed at another record high—the 11th since the start of the year—to breach the 6,200 level for the first time in history.
The main Philippine Stock Exchange index (PSEi) surged 42 points, or 0.68 percent, to close at 6,234.73 percent on Tuesday while the broader all-shares index gained a similar 0.69 percent.
The strong performance followed statements by President Aquino saying that the Philippine economy likely grew faster than 6 percent—the top end of the government’s target—in 2012. The government will release economic growth figures on Thursday.
All sub-indices were in the green, led by the property counter, which rose 1.37 percent. Lagging behind was the financial sector, which gained only 0.24 percent.
Total volume was 2.67 billion shares valued at P10.131 billion. The 109 advancers led 67 decliners while 40 issues were unchanged. The market’s performance defied expectations by analysts, who said a breather would be necessary for the index to advance past 6,200.—Paolo G. Montecillo
Global insurance giant Sun Life of Canada sees the Philippine stock index rising to as high as 7,000 this year on a favorable mix of historically low interest rates, high investor confidence, strong macroeconomic fundamentals and better global economic backdrop.
In a briefing on Wednesday, Sun Life chief investment officer for Asia Michael Manuel said that although the main-share Philippine Stock Exchange index might not accelerate in the same pace as seen in the last two years, there was still room for stock prices to hit new highs.
Over the next 12 months, Manuel said Sun Life’s base scenario was for the main index to rise to 6,500, suggesting an upside of about 12 percent from the end-2012 level of 5,812.73. He, however, added that the best-case scenario would be 7,000, given the rosy outlook presented by President Aquino to the Fil-Swiss community in Zurich over the weekend.
Speaking before advisers of Sun Life Asset Management Co. (SLAMC), the mutual fund management unit of Sun Life in the Philippines, Manuel said advisers should “not to be blinded” by index targets. He said it was the fund managers’ job to pick stocks so that investors could participate in the Philippine story.
He said the investment strategy for the Philippines this year would be to remain “overweight” (a recommendation to accumulate in excess of the benchmark index) on equities and invest in a combination of big and small caps. Sun Life’s preferred sectors are banking, infrastructure/cement, property and conglomerates, Manuel said.
During her opening speech in this internal forum, Sun Life Financial Philippines president Riza Mantaring said the Philippines was “in the middle of an economic upswing.”
“It really feels like we’re on the verge of economic take-off,” she added.
SLMAC’s target is to hit P50 billion in assets under management (AUM) by 2015 from some P29 billion as of end-January. Mantaring said the target this year would be to expand AUM to P35 billion which, she said, could easily be exceeded.
Manuel said the combination of low interest rates and high confidence was very good for the economy. The Philippine growth story, he added, was supported by robust consumer spending, improving investments, stable banking system and a much-improved government fiscal situation.
“The confidence is not only in the economy but also in the political leadership,” Manuel said.
Manuel said the Philippine sovereign was on the brink of getting an investment grade rating this year, predicting that an upgrade from Fitch Ratings and Moody’s would likely come ahead of Standard & Poor’s. He said the Philippines was in a better shape compared to Indonesia, which already enjoys investment grade.
In an interview after his presentation, Manuel said Sun Life’s stock market outlook for this year assumed a 12-percent growth in corporate earnings. Excluding telecom stocks, he said the average corporate earnings could grow by as much as 17 percent this year.
He said that price-to-earnings (P/E) ratio was at about 18x expected earnings for 2013. However, he said the market paid as high as 22x P/E in 1997 when the country was facing an Asian currency crisis.
(The Philippine Star) | Updated February 1, 2013 - 12:00am
MANILA, Philippines - The Philippine Stock Exchange index (PSEi) retreated yesterday from record highs after a five-day run-up, declining 0.45 percent or 28.49 points to settle at 6,242.74 after investors took profits following the announcement that fourth quarter and full year Philippine economic growth beat expectations.
The main index traded in the green for most part of the day, posting a new intraday high at 6,332.27 before profit takers ruled the market in the afternoon.
“There is always this sell on news principle. The market’s run-up was based on two reasons: the reduction of the special deposit accounts’ rates and the expectations over gross domestic product (GDP),” Jomar B. Lacson, head of research at Campus, Lanuza& Co. Inc., said in a phone interview.
Lacson said investors pocketed gains after the strong GDP growth figures were announced.
Fourth quarter GDP posted a 6.8-percent growth, bringing full-year 2012 growth at 6.6 percent, which is above the five to six-percent forecast of the government.
The National Economic and Development Authority’s conservative forecast for this year is six to seven percent.
The decline in benchmark indices abroad also contributed to the drop in local share prices, Lacson said.
On Wednesday, Wall Street fell given news that the US economy surprisingly shrank in the fourth quarter, with the US Federal Reserve announcing that the economy is still struggling to regain its momentum.
(The Philippine Star) | Updated February 4, 2013 - 12:00am
Two weeks ago, we wrote about the run-up of the PSE Index (The Run-up, Jan. 21, 2013). This started on Dec. 18, 2012 when the index was only at 5,623.85. Even after we wrote about it, the PSE Index continued its run-up and ended last week at a new all-time high of 6,318.61. The PSE Index has so far yielded a year-to-date return of 8.7 percent. With this, the impressive run-up of our index has delivered a whopping 12.4 percent in just 1 ½ months.
Even though the PSE Index was down 0.5 percent on the last day of January 2013, it ended the month 7.4 percent up. In the table below, we show that the performance of our index for January 2013 was one of its strongest starts in recent years. Moreover, the table shows that in the last 10 years, a positive return for the index in the month of January has always led to a positive return for the whole year.
Why is the Philippine stock market experiencing a run-up?
The PSE Index is experiencing a run-up because investors, both foreign and local, are becoming more interested about the Philippine growth story. While our growth profile before was inconsistent and cyclical, it has gradually strengthened and has become more of the structural type. This is due to the long-term structural transformation that our country went through over the past years (Secular Bull Market, Jan. 28, 2013). We believe that our country has all the necessary ingredients needed to deliver higher economic and corporate earnings growth for many years to come. In addition, record low interest rates in the country have caused investors to shift from fixed income to equities. In fact, our Philequity Fund has experienced record inflows for the month of January.
What are the recent catalysts for this continuing run-up?
1. Enlightened foreign ownership rules. The issue on the restrictive foreign ownership limits on local stocks caused our market to correct before. Though the Securities and Exchange Commission (SEC) has yet to finalize the guidelines for this, we laud SEC chairperson Teresita Herbosa for clarifying that the regulator looks to impose a more enlightened ruling that balances the protection of local business interests and the promotion of a healthy investment climate.
2. Special Deposit Account (SDA) rate cut. The Bangko Sentral ng Pilipinas (BSP) recently reduced the interest rate that it pays to its SDA depositors to three percent, cutting it by 50 basis points. The BSP’s SDA facility currently houses ~P1.7T in deposits. The BSP’s move to reduce the SDA rate has already caused a shift from SDAs to local stocks. This shift will likely persist in the near to medium term.
3. GSIS to increase equities exposure. Last week, GSIS president Bernie Vergara said that the fund was looking to increase its exposure to the local stock market to 19 percent from 15 percent last year. Since GSIS has P685 billion in investible funds, the move to increase its equity exposure by four percent may bring additional P27 billion worth of inflows to our stock market.
4. P-Noy: “All of us will be impressed.” Ahead of the release of the 4Q2012 and FY2012 GDP report, President Aquino remarked that everyone will be impressed with the country’s GDP growth. And indeed, investors were impressed. The country’s 4Q2012 and FY2012 GDP growth came in at 6.8 percent and 6.6 percent, respectively. These results exceeded the official target of five to six percent.
5. Philippines in the radar of foreign fund managers. Despite our stock market run-up, many foreign fund managers are still not invested in the Philippines. Recently, these fund managers have been coming to our country in droves, looking to invest in our stock market. Last week, JPMorgan brought some of its clients to the Philippines for a country visit and investor forum. JPMorgan has recommended an overweight rating on the Philippines for the past few years and reiterated this overweight call for the Philippines last week.
6. Positive contagion. Recent developments regarding the recovery of the US economy, the strong 4Q2012 GDP of China and the aggressive monetary easing of Japan have all driven their respective stock markets higher and have caused our stock market to also move higher, in tandem with theirs. As the old saying goes, “A rising tide lifts all boats.”
What is happening to other global stock markets?
In the past few months, global stock indices such as those of the US, Germany, China, Japan and the ASEAN have all been moving-up and have recently reached multi-year highs or new all-time highs (Global Bull Market, Jan. 7, 2013). In fact, last week, the Dow Jones Industrial Index closed above the 14,000 level for the first time since October 2007. Moreover, the S&P 500 Index delivered its best start since 1997 as it ended January 2013 with a five percent return.
Why do other global stock markets continue to move higher?
Global equities continue to move higher because the global macroeconomic headwinds that most investors have been concerned about seem to be dissipating. Problems such as the slow growth and the fiscal cliff of the US, the European sovereign debt crisis and the hard-landing scenario for China have all seemed to abate, at least for now. This budding global economic recovery is primarily due to the aggressive and creative intervention of global central banks led by Fed chairman Ben Bernanke (The Great Global Monetary Easing, Oct. 22, 2012).
The bold actions of global central banks, including the BSP, have also pushed interest rates to record lows. These have driven bond yields significantly lower, making stocks relatively cheaper investments compared to bonds. Moreover, the record low interest rates penalize those holding significant amounts of cash and bank deposits, driving them to instead use their money to invest in businesses or buy stocks.
Is the country’s high GDP growth sustainable?
Now that the country has proven that it can deliver high GDP growth, the next challenge will be sustaining GDP growth at the five-to seven percent level (6000, Jan. 14, 2013). This will be imperative in bringing a more inclusive type of economic growth that trickles down to the poor. Aside from this, the government must leverage on its strong fiscal position in order to aggressively roll-out infrastructure projects via Public-Private Partnerships (PPP). At this point, investments in infrastructure are very much needed to propel our economic growth to the next level and precipitate the growth of sectors such as manufacturing, tourism and exports. We are fortunate that our current government is aware that there is much to be done and that efforts should be focused in sustaining our high GDP growth.
Will corrections happen?
Although there are numerous reasons for our bullishness, we believe that corrections will always be there as they are part and parcel of a bull market. However, corrections are extremely hard to predict and no one really knows when they will happen or how long and how deep they will last. Because of our stock market’s run-up and the relatively short and shallow corrections that we experienced, many investors and professionals have missed the boat trying to anticipate and preempt a significant correction. One cannot keep waiting for corrections when the bull is running its course.
How do we trade this market?
While buying on dips might be preferable, we have not really had any significant corrections recently. Considering this, we recommend buying in tranches and using peso cost averaging in gradually increasing one’s exposure to Philippine stocks. We also recommend buying stocks that represent the unique Philippine growth story. These are stocks in the consumer, retail, banking, utilities and property sectors. For those who cannot monitor the market on a daily basis, it might be good to invest your money in a mutual fund that will be handled by a professional fund manager. For those who have followed our advice before and are long Philippine stocks, our advice stays the same: stay the course (Staying the Course, January 2012), keep your winners (Hold on to your winners, April 16, 2012) and invest in companies with solid fundamentals and strong earnings growth.
Due to the impressive run-up of the local stock market and the improving global macro picture, we are looking to upgrade our PSE Index target of 6,700 to 6,800. Our views and assumptions for the PSE Index target will be explained in greater detail on our investor briefing on Feb. 19, 2013.