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Philippines to toe the line april

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COL 2014 Fundamental Market Outlook …

COL 2014 Fundamental Market Outlook

Presentation by Mrs. April Lee-Tan, CFA
COL Head of Research

Published in: Economy & Finance

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  • 1. Philippines to “Toe The Line” An idiomatic expression meaning to conform to a rule - Wikipedia
  • 2. Philippines to “Toe The Line” PSEi Trailing P/E Band 25.0 21.2 20.0 15.0 10.0 5.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bloomberg The PSEi went ahead of itself during 1H13…
  • 3. Philippines to “Toe The Line” … Brought About By Ample Liquidity Conditions Net Foreign Buying in the PSE 10-Yr Bond Rate Php Bil % Change 2008 -51 -177.2% 2009 20 140.1% 2010 54 164.8% 2011 58 6.6% 2012 98 69.5% 5M13 72 109.4% 8% Source: Bloomberg 7% 4% 3% 0% 2011 Source: Bloomberg 2012 2013
  • 4. Prospects to Reduce Liquidity Trigger Sell-off in May Timeline of News on Tapering of US Fed Bond Buying Program MAY 22 DEC 18 Fed minutes noted that a number of participants expressed willingness to reduce QE as early as June Fed announced it would start to taper its bondbuying program from US$85 Bil to US$75 Bil a month beginning in January Jan 29 Fed announced it would taper its bond-buying program further to US$65 Bil a month beginning in February
  • 5. Sell-off Continues Normalization process not yet over Factors Negatively Affecting the Philippine Market Bad news locally Weakness of other emerging market or EM economies
  • 6. Normalization Process Not Yet Over Relative Valuation of Global Markets 2014 P/E EPS Growth 10-YrAve P/E Philippines 16.3 6.4% 14.9 Thailand 11.7 8.0% 13.9 Vietnam 11.5 11.2% 16.2 Malaysia 15.6 9.5% 15.5 Indonesia 13.4 12.5% 18.0 US 14.9 9.6% 16.2 Europe 12.5 29.0% 13.8 India 14.8 8.4% 18.7 China 7.9 19.8% 20.7 Source: Bloomberg Valuations not yet cheap relative to earnings growth, other markets & historical average
  • 7. Normalization Process Not Yet Over Spread of Philippines and US 10-Yr Bond Rates US vs Phil 10 Year 10 US 10 Year PH 10 Year 8 Spread 6 4.1 4 2.7 2 1.4 Source: Bloomberg 1/31/2014 10/31/2013 7/31/2013 4/30/2013 1/31/2013 10/31/2012 7/31/2012 4/30/2012 1/31/2012 10/31/2011 7/29/2011 4/29/2011 1/31/2011 10/29/2010 7/30/2010 4/30/2010 1/29/2010 10/30/2009 7/31/2009 4/30/2009 1/30/2009 0 Interest rates still have room to increase
  • 8. Normalization Process Not Yet Over Interest Rates Still have Room to Increase 10 Yr- Bond Rate vs. Inflation Rate of BBB Rated Countries 12.00 Too High Interest Rate 10.00 8.00 y = 0.6979x + 3.1317 R² = 0.7988 6.00 4.00 Philippines 2.00 Too Low 0.00 -2.00 0.00 Source: Bloomberg 2.00 4.00 6.00 Inflation Rate 8.00 10.00 12.00
  • 9. Normalization Process Not Yet Over Peso Continues to Weaken Peso is weaker by 10.1% compared to start of 2013 PHP:USD (2013-present) 46 45.013 44 42 40 1/2/2013 Source: Bloomberg 4/2/2013 7/2/2013 10/2/2013 1/2/2014
  • 10. Weakness of Other EM Economies Lackluster YTD Performance of “Fragile Five” + Thailand Stock market Index USD Exchange Rate End 2013 3-Feb Basis Point Change -4.1% 10.18 9.96 -22 11.09 -5.4% 7.91 8.70 79 2.36 2.41 -1.9% 13.20 13.43 23 -4.3% 61.80 62.54 -1.2% 8.83 8.71 -12 4,384 2.6% 12,171 12,194 -0.2% 8.45 9.07 62 1,299 1,280 -1.4% 32.70 32.76 -0.2% 3.93 4.00 7 5,890 5,908 0.3% 44.40 45.33 -2.1% 3.50 4.05 55 End 2013 3-Feb % Change End 2013 3-Feb % Change Turkey 67,802 63,284 -6.7% 2.15 2.24 South Africa 46,256 44,437 -3.9% 10.52 Brazil 51,507 46,964 -8.8% India 21,171 20,261 Indonesia 4,274 Thailand Philippines Source: Bloomberg 10-Yr Bond Rate
  • 11. Bad News Locally Negative News o Lackluster 3Q13 earnings season o Typhoon Yolanda to pull down GDP growth o “Soft spots” in 4Q13 GDP data • Constructions spending down 0.5% • Government spending down 5.2%
  • 12. Current Market Weakness an Opportunity to Accumulate Stocks Reasons to be Bullish Over the Longer Term o o o o Most factors hurting investor sentiment are noise Abundance of favorable economic developments merely overlooked Higher rates already priced in Stocks are currently the most attractive peso investment instrument available
  • 13. Most Factors Hurting Investor Sentiment Are Noise Philippines Fundamentally Stronger than other EMs 6.0 Current Account Balance (% GDP) 3.1 2.8 4.0 2.0 0.0 -2.0 0.2 Turkey -4.0 -6.0 -8.0 -10.0 -12.0 South Africa -3.6 -6.1 -7.2 -9.7 Brazil -2.1 -2.4 -3.6 -5.5 -6.8 2011 India Indonesia -3.8 -4.4 -5.4 2012 -2.8 -3.7 4.2 1.2 Thailand -0.4 -1.5 Philippines 2013 Source: Bloomberg Strong current account balance makes Philippines less vulnerable to the impact of US Fed tapering
  • 14. Most Factors Hurting Investor Sentiment Are Noise Impact of Typhoon Yolanda to be Minimal o Impact on 2014 GDP growth is only 0.3% (NEDA) o Eastern Visayas accounts for only 4.5% of GDP o Php361 Bil recovery and reconstruction spending from 2013 to 2017 to act as an offset
  • 15. Most Factors Hurting Investor Sentiment Are Noise Construction to Benefit from 35% Growth of Infrastructure Spending in 2014 Infrastructure Spending 2013E 2014E 2015E 2016E Infra Spending (Php Bil) 295 399 601 835 % Change 24% 35% 51% 39% % GDP 2.5% 3.0% 4.0% 5.0% Source: DOF, DBM, NEDA
  • 16. Most Factors Hurting Investor Sentiment Are Noise Government Spending to Increase by 13% in 2014 Expenditure 2013 2014 % change Social Services 699.4 841.8 20.4% Economic Services 509.2 593.1 16.5% General Public 347.3 362.6 4.4% Services 360.4 377.6 4.8% Debt Service 89.5 89.5 0.0% Defense 699.4 841.8 20.4% 2,005.8 2,264.6 12.9% Total Source: Bloomberg o Removal of PDAF only reduced budget by Php3.2 Bil (0.14% of original proposed budget) o Bulk of the Php25 Bil proposed budget for PDAF realigned to calamity funds and other projects o Spending on social and economic services to increase faster
  • 17. Abundance of Favorable Economic Developments Merely Overlooked OFW Remittances and BPO Revenues Remain Strong. . . OFW Remittance BPO Revenues (US$Mil) 25.0 30.0% 20.0 25.0% 20.0% 15.0 15.0% 10.0 10.0% 6.1% 5.0 5.0% 0.0 0.0% 2002003004005006007008009010011012013 2 2 2 2 2 2 2 2 2 2 2 Source: BSP 18,000 16,000 16,000 13,000 14,000 11,000 12,000 9,000 10,000 7,200 8,000 6,061 4,875 6,000 3,257 4,000 2,420 1,475 2,000 0 200420052006200720082009201020112012 2013E Source: BSP To fuel consumer spending growth and ensure strong current account position
  • 18. Abundance of Favorable Economic Developments Merely Overlooked …While Exports Rebound... Exports (% Growth) 25.0 20.2 20.0 14.0 15.0 10.0 5.0 0.0 -5.0 -2.7 Jan-13 Feb-13 -20.0 Source: NSO -0.8 Mar-13 Apr-13 May-13 Jun-13 -10.0 -15.0 0.1 4.1 -15.6 -11.1 2.3 Jul-13 18.9 5.1 Aug-13 Sep-13 Oct-13 Nov-13
  • 19. Abundance of Favorable Economic Developments Merely Overlooked …Weak Peso is Favorable o Additional spending power of families dependent on OFW remittances o Improves Philippines’ competitiveness as an exporter and BPO destination
  • 20. Abundance of Favorable Economic Developments Merely Overlooked FDI and Manufacturing Sector Showing Signs of Strength FDI (US$Mil) % Change 2011 1,816.0 39.9% Mfg GVA (PhpBil) 2,047.6 2012 2,797.0 54.0% 2,171.0 6.0% 2013* 3,361.4 35.3% 2,350.4 8.3% Net FDI 10Mo 2013, Mfg full year (nominal) Source: BSP, NSCB % Change 6.1%
  • 21. Abundance of Favorable Economic Developments Merely Overlooked Drivers of Investment Spending o o o o Strong and resilient domestic consumption Credit ratings upgrades Improving competitiveness of the Philippines Strong and liquid financial system
  • 22. Drivers of Investment Spending Strong and Resilient Domestic Consumption Domestic Consumption (% Growth) 8.0 6.0 6.0 5.7 4.4 4.2 4.6 4.0 Drivers: 6.6 5.6 4.6 3.7 3.3 2.3 2.0 0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Domestic consumption Source: NSCB Average o Resilient OFW remittances o Growing BPO sector o Young and growing population
  • 23. Drivers of Investment Spending Philippines Upgraded to Investment Grade in 2013 Ratings Agency Rating Upgrade Date Fitch BB+ Jun-11 BBB- Mar-13 BB Nov-10 BB+ Outlook from "stable" to "positive" BBB- Jul-12 Dec-12 Ba2 Jun-11 Ba1 Oct-12 Baa3 Oct-13 S&P Moody's Apr-13
  • 24. Drivers of Investment Spending Minimum Wages & Wage Hikes Current Minimum Wage Local Currency US$/Day Thailand BT 300/day 9.6 Indonesia IDR 2.2 Mil/ Mo 8.8 Philippines Php466/day 10.7 Source: Various newspaper reports Rate Hike +35% y/y effective 2012-2013 +40% y/y in Jakarta 2013 +2.3% y/y in Manila 2013 Philippine labor cost now more competitive with that of neighbors due to significant wage hikes of neighboring countries
  • 25. Drivers of Investment Spending Most Improved for Doing Business o According to World Band and International Finance Corp.’s “Doing Business 2014” report o Ranking improved by 30 points to 108th out of 189 Source of Improvements: o Less requirements to obtain construction permits o Improved access to credit information o Easier to pay SSS contributions
  • 26. Drivers of Investment Spending Banking Statistics (Universal & Commercial Banks) NPL Ratio Provision/ Loans/ NPL Deposit Loans/ Deposit + SDA 2010 2.9% 118.3% 62.6% 49.1% 2011 2.2% 126.4% 68.4% 50.9% 2012 1.9% 141.5% 71.6% 53.9% 11M13 2.4% 132.3% 60.8% 49.9% Capital Adequacy Ratio Minimum Requirement Source: BSP 10.0% Basel III (2014) Philippine Banks (3M13) BSP 10.0% 18.9% Strong and liquid financial system
  • 27. Higher Rates Already Priced In PSEi Targets Under Different Interest Rate Scenarios PSEi Target 10-yr Bond Rate assumption End 2014 % Upside from 6,000 Source: COL estimates Base Case Bear Case 5.0% 5.5% 6,900 6,600 15.0% 10.0%
  • 28. Stocks are Currently the Most Attractive Peso Asset Class Available Comparative Yield of Different Asset Classes Stocks Time Deposit SDA 10-Yr-T-Bond 6.0% 0.85% 2.0% 4.1% *The PSEi’s earnings yield based on 6,000 Due to low interest rates, stocks remain the most attractive peso asset class even though valuations seem expensive compared to historical averages
  • 29. Stocks are Currently the Most Attractive Peso Asset Class Available Comparison of Different Investment Products Investment Instrument Positives Negatives Bank Deposits Very liquid Low yield; High risk of losing purchasing power Liquid Money Market Fund Yields higher than bank deposits Interest income is not paid out to investors Bonds Stocks Higher yields, especially for longer dated bonds Yields still below inflation; High risk of losing purchasing power Bond prices drop in response to higher interest rates Prices of longer dated bonds are more sensitive to interest rate movements Returns are higher compared to other Highly volatile, especially in the ST asset classes over the LT Not sensitive to rising rates over the LT Dividend yield of some stocks are higher than bond rates
  • 30. Stocks are Currently the Most Attractive Peso Asset Class Available PSEi EPS Growth and P/E Multiple Estimates EPS Growth P/E (X) 2014 6% 16.4 2015 14% 14.4 PSEi at 6,000 Source: COL estimates Fundamentals to eventually catch up with price
  • 31. Summary of Factors Affecting the Market Negatives o Philippine stocks are not yet cheap relative to other markets globally o Interest rates have room to increase o Peso could still weaken Positives o Nothing fundamentally wrong with the Philippines o Higher interest rates already priced in o Stocks remain the most attractive peso asset class
  • 32. Summary of Factors Affecting the Market Negatives Positives o Nothing fundamentally o Philippine stocks are wrong with the not yet cheap relative Philippines to other markets o Higher interest rates globally already priced in o Interest rates have o Stocks remain the most room to increase attractive peso asset o Peso could still weaken class Conclusion: Although stocks will most like stay here in the ST, they will continue to go up in the LT.
  • 33. “Buy Now” or “Buy Later”? Buy Now Positives: o No possibility of missing out Negatives: o Opportunity cost of capital o Possible ST losses o Emotional impact of ST losses or “prospecting” Prospect theory explains why people would rather place money in SDAs (2%) than buy PLDT stocks (7% div yield)
  • 34. “Buy Now” or “Buy Later”? Buy Later Positives: o No opportunity cost of capital Negatives: o Nobody knows the bottom o Prices may be significantly higher later o “Anchoring” bias might cause investors to miss out Technical BUY signal (+40% from low) Anchoring bias explains why most investors did not buy the PSEi in 4Q09 despite the technical BUY signal
  • 35. ‘Peso Cost Averaging” Is a Good Compromise Peso Cost Averaging Strategy o Buy only a fixed value of stocks in a period of time o Buy only when thresholds are hit (ex., “buy below price”) Positives: o Limits the amount of exposure o Improves average buying price assuming stock prices continue to drop o Creates discipline, removes “emotions” out of investing (prospecting, anchoring)
  • 36. ‘Peso Cost Averaging” Is a Good Compromise Peso Cost Averaging Strategy Risks are no longer significant o Higher rates already priced in o Stocks remain the most attractive peso asset class
  • 37. Stock Picks – Adding BDO, MBT, ALI & SMPH Removing PGOLD and RLC “COLing the Shots” Model Portfolio Current Price FV Buy Date Buy Below Price EEI 10.00 12.70 30-Mar-12 11.04 MEG 3.74 4.54 11-Jan-13 3.95 TEL 2,648.00 3,260.00 11-Jan-13 2,834.78 DNL 6.95 9.10 14-Feb-13 7.91 AC 525.50 689.00 5-Aug-13 599.00 BDO 79.50 94.00 23-Jan-14 81.74 MBT 76.80 100.00 23-Jan-14 87.00 ALI 26.15 36.08 23-Jan-14 31.37 SMPH 14.82 19.41 23-Jan-14 16.88
  • 38. New Stock Picks BDO (Php79.50, FV: Php94.00) MBT (Php76.80, FV: Php100.00) o o o o o Prices have corrected to attractive levels BDO now at 1.6X 14E P/BV while MBT now at 1.4X 14E P/BV Rising interest rates will only hurt banks’ trading income Demand for loans remains robust BDO and MBT are less dependent on trading income to generate profits given their large size
  • 39. New Stock Picks ALI (Php26.15, FV: Php36.08) o Property prices and demand for properties are not expected to weaken despite higher interest rates o Steep decline in prices of property companies an opportunity to buy, with ALI now trading at 38% discount to NAV, wider than its historical average discount of 26% o ALI is expected to deliver among the faster earnings growth despite its larger size o Other strengths include its huge landbank and numerous rental properties
  • 40. New Stock Picks SMPH (Php14.82, FV: Php19.41) o A hybrid consumer and property play o Despite its larger size post merger with other SM property companies, around 60% of revenues and 70% of EBIT in the next few years will still come from rental income o Larger size provides numerous advantages over the LT such as the ability to roll-out large-scale master planned mixed use developments and more financing options o Valuations are also attractive, with SMPH trading at 20.1X 14E P/E vs. consumer sector average of 27.4X and 31% discount to NAV.
  • 41. New Stock Picks Removing PGOLD and RLC PGOLD o Stock could underperform the market as valuations are no longer attractive o Stock trading at 23X 14E P/E, earnings growth to slow to 13% in 2014 from 36% in 2013 RLC o We still like the company but we feel that ALI is a better play o RLC’s earnings growth is expected to be slower compared to ALI since its portfolio is more defensive, largely comprised of mall and office rental properties
  • 42. It Pays To Think Long Term S&P 500 (1993 – 1995) 550 500 First rate hike on Feb 4, 1994. Total of 6 rate hikes (+2.5% on Fed fund rate) over the next 10 months. 450 400 Source: Bloomberg 1 year consolidation of the S&P
  • 43. It Pays To Think Long Term S&P 500 (1993 – 2001) 1600 800 First rate hike 400 Jan-93 Jan-94 Source: Bloomberg Jan-95 Following the 1994 consolidation, S&P rallied from 1995 to 2000, reaching a peak of 1,527 in March 2000 (up 217% from its 1994 high of 482). Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01
  • 44. It Pays To Think Long Term S&P 500 (2003 - 2005) 1300 April 20, 2004, Fed hints that it will raise Fed fund rates soon. First rate hike on June 30, 2004. Total of 17 rate hikes (+4.25% on the Fed fund rate) over the next two years. 1200 1100 1000 5 1/2 months consolidation of the S&P 900 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Source: Bloomberg
  • 45. It Pays To Think Long Term S&P 500 (2003 - 2008) 1600 1400 Hint of first rate hike 1200 Following the 2004 consolidation, S&P rallied from 2005 to 2007, reaching a peak of 1,565 in Oct 2007 (up 35% from its 2004 high of 1,158) 1000 800 Jul-03 Source: Bloomberg Jul-04 Jul-05 Jul-06 Jul-07
  • 46. COL FINANCIAL HELPING YOU LIVE RICHER LIVES. For more information visit www.colfinancial.com