Jan 1, 2013

Philippines - As returns on Philippine markets rise, so do risks

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As head of one of the largest retail-based brokerage firms in the country, Conrado Bate is often found extolling the virtues of investing in the Philippine Stock Exchange.

Nowadays, however, Bate—who heads COL Financial Group and its popular online trading platform CitisecOnline.com—is more cautious, saying that the hoped-for returns of some investors in the local bourse seem to be beyond the ability of stock prices to achieve.

“People have to be realistic,” he said in an interview with the Inquirer. “We have to temper expectations.”

Bate knows whereof he speaks. He used to head the local unit of Jardine Fleming Securities, which used to be one of the largest and most influential stock brokerage firms in the country.

He was at its helm when the 1997 East Asian financial crisis hit—a financial meltdown caused by unrealistically high expectations that began in the property market, spilled over to the stock market, before finally making its way to the corporate and consumer scenes.

Bate believes that the strong performance of stocks this year was due largely to investors being lured by the vigorous performance of the Philippine economy, punctuated by the 7.1-per cent gross domestic product (GDP) growth in the third quarter.

“But that kind of GDP growth is unsustainable,” he said, pointing to the large role that construction of high-rise buildings played in the previous quarter’s economic performance.

The COL financial chief pointed out that the economic boost created by construction sector jobs were, at best, a temporary phenomenon and far from permanent.

“There’s only so much they can build,” he said. “Once the the structures are completed, the jobs go away.”

Persistent optimism

But the optimism being felt by businessmen here and abroad toward the Philippines is undeniable.

This includes optimism in the property sector whose fortunes are intertwined with that of the stock market and the broader economy.
Witness to this bullishness is David Leechiu, who runs property consulting firm Jones Lang Lasalle Leechiu.

Leechiu’s firm manages real estate developments around Metro Manila’s central business districts and helps foreign firms find suitable building space for the offices they want to set up locally.

From his perch, Leechiu has a front row seat to one of the country’s most compelling economic performances in recent memory.

“Business is not good. It’s ultra fantastic,” he said in an interview. “In fact, our (firm’s) top line is at an all-time high. We’ll exceed it by 50 per cent this year, both for the brokerage and property management (sides of the business).”

His optimism that the boom is sustainable rests on the fact that the Philippine economy is flush with liquidity, facilitated by extremely low interest rates in the United States and Europe that are driving investors to emerging markets.

In fact, the total liquidity in the local financial system—excluding funds raised from debt—is now equivalent to 1.5 times the size of the Philippine economy.

“Grabe,” Leechiu exclaims, when asked about his firm’s project pipeline. “For property investment and leasing, we have buyers prepared to put down a total of 1.5 billion pesos (US$36 million), all in cash.”

Neither is he worried about the luxury property market where real estate bubbles usually start, since the segment makes up only a small portion of the entire industry.

“People who are buying high-end properties are buying them for the next generation,” he said, noting a key difference with the 1997 property bubble where buyers acquired expensive condominium units and “flipped” them for a profit in just a few months, often before construction of the building began.

Persistent caution

Japanese financial giant Nomura has a more sanguine view of the local property market in particular, and the Philippine stock market in general.

In a recent research note, it cited the country’s property sector stocks as having one of the best performances in Asia this year which, having risen 42 per cent year-to -date, is second only to China’s 50 per cent.

Despite this, Philippine property firms are given only a “neutral” rating, with Nomura pointing out that the performance of 2012 would be difficult to replicate.

It also sounded an additional note of caution, saying it believed that “the Philippine equity market is looking frothy, and outperformance may have run its course for now”.

Using the price-earnings ratio for their expected 2013 net income, the study noted that Philippine stocks are now trading at close to 17 times what they expect to earn on a per share basis.

Current prices also stand at about 18 per cent above their long-term averages.

“Compared to the rest of the region, the relative forward price-earnings ratio is close to all-time highs, and higher than what Indonesia achieved at its peak,” the note from Nomura stated, as the company advised its clients to tread lightly in the Philippines with an “underweight” rating.

With authoritative voices making the case for either optimism or caution, what is increasingly clear for the road ahead is that prospects for the Philippine property markets, equities and the broad economy remain robust.

But the risks are rising commensurately as well.

Daxim L. Lucas

Business & Investment Opportunities
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