Market Appears Costly to Some Foreign Investors and Has Cooled Since a
Record Earlier This Month
The stock market in the
Philippines has shot up nearly 19% this year, making it one of Asia's top
performers for a second year. But some investors are getting nervous about
chasing further gains.
The explosive speed of the rally,
driven largely by foreign funds rushing in for a piece of the fastest economic
growth in Southeast Asia, has caught analysts by surprise and left the market
looking costly.
"Our view is the valuation
is getting stretched and caps the upside from here," said Arthur Kwong,
head of Asia Pacific Equities at BNP Paribas Investment Partners, which manages
€58 billion ($71 billion) of assets in Asia.
The local benchmark index, the
Philippines PSE Composite, is trading at 16 times predicted annual earnings,
making it nearly twice as pricey as South Korea's Kospi Index at 8.3 times
expected earnings and more than twice as dear as Hong Kong's Hang Seng Index.
"There are a lot of things
that we like in the Philippines, except one thing: It is the most expensive
market in the region," said Herald van der Linde, Asia Pacific equity
strategist at HSBC HBC in Hong Kong, which advises investors to hold less
Philippines assets in a fund portfolio than dictated by the major benchmark
indexes.
Cracks already are appearing, as
the Philippines, after outperforming for much of the year, is now slipping
back. The PSE index is down 3.4% from a record reached earlier this month and
on Thursday fell 31.18 points, or 0.6%, to 5189.37.
Its neighbors are catching up,
with Thailand now up 18% and Vietnam climbing 22%, Asia's top-performing index.
On a global ranking, only Venezuela and Egypt have beaten these Southeast Asian
markets that have benefited from accelerating growth, credit-ratings upgrades
and partial insulation from Europe's woes.
The Philippine peso, too, which
had rallied as much as 4.6% this year against the U.S. dollar, making it Asia's
best-performing currency, has also slipped back.
Much of the enthusiasm for the
Philippines stems from President Benigno Aquino III's moves to clean up
corruption, reign in the budget deficit and boost spending on crumbling roads,
train systems and airports by partnering with private companies. With first-quarter
growth at an annualized 6.4% rate, the second-best in Asia after China, some
fund managers are sticking with their investments.
"The underlying fundamentals
of the economy are improving," said Aira Gaspar, chief investment officer
at Manulife Financial MFC in Manila, which has $1 billion of assets under
management locally. "We are still positive on our medium-term view."
The ratings companies have also
rewarded the government's efforts with a string of credit-rating upgrades.
Standard & Poor's this month raised its long-term rating to BB+ from BB,
still in the "junk" category but just one notch below investment
grade, which allows global pension funds and other large investors to buy the
country's debt. The central bank on July 7 said it deserves a higher rating.
"The next step would be to
give a clear sign that we are heading toward a balanced budget," said Jose
Vistan, associate vice president for research at AB Capital Securities in
Manila. "That would be a significant step that could cause an
upgrade."
But even the prospects for an
upgrade aren't enough to keep international funds from retrenching from a
market that many investors believe has topped out. Southeast Asia's checkered
history of political instability is also a concern, some say. Global funds
tracked by EPFR pulled money out of the Philippines' stock market in May for
the first time in 2012, as the euro zone's debt crisis worsened. Outflows were
also recorded in June, although at a much slower pace.
One warning sign that investors
in the Philippines are heeding is the change in sentiment over Indonesia. Last
year, Indonesia garnered huge enthusiasm as investors poured money in to
capture its consumer- and commodity-led boom. This year, the interest has
ebbed. Foreigners have pulled out $2 billion from Indonesia's government bond
market, pushing down the rupiah and sapping strength from the country's
stock-market rally.
"Philippines has been the
darling of many emerging-market fund managers this year...as it was one of the
rare positive stories out there," Adrian Zuercher, senior investment
strategist at Credit Suisse Asset Management, which managed 403.4 billion Swiss
francs ($413 billion) globally as of the first quarter of 2012. "We are
now at a point where, to attract new money, it will be hard" because the
market went up too much and too quickly, added Mr. Zuercher.
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