Opportunities and risks in ‘expensive’ Philippine stock market

The Philippine Stock Exchange is one of the most expensive markets in Asia but it also has strong growth potential, leading experts to differ on if there will be short-term losses to correct for the overvaluation

MANILA, Philippines – By most counts, the Philippine Stock Exchange (PSEi) is expensive. What experts disagree on is if that is good or bad for the market in the short-term.

In the medium- to long-term, the outlook on the risks and returns of investing in the local market remains favorable, according to most analysts Rappler talked to. 

As it stands now, the PSEi is considered the most expensive out of 10 Asian and international markets tracked by COL Financial Group as of August 17, 

A month prior, Bloomberg also counted it as the most expensive among 15 Asian markets that it tracks. 

Calculating based on past earnings, COL found that PSEi stocks are valued at 17.2 times estimated earnings. Looking forward, the local index is valued slightly lower at 16.3 times estimated future earnings but it is still valued much higher than its regional peers.

   Trailing PE   Forward PE 
Philippines  17.2 16.3
Thailand 17.1 13.3
Vietnam 11.0 10.3
Malaysia 15.7 15.2
Indonesia 18.3 13.9
S&P 14.4 13.7
Brazil 18.1 11.7
Russia 5.1 5.4
India 15.2 13.9
China 11.5 10.3

* Data courtesy of COL Financial Group

Experts are closely looking at two possible incidents in the coming months that could influence the PSEi to go up or down: the prospect of a credit rating upgrade, which merits investing in Philippine stocks, and the “ghost” period between August and September. 

Fear of the ‘Ghost Month’

The high value of the stock market has already prompted analysts to predict short-term pullbacks, which are especially likely during the time span of August 17 to September 15 — or the lunar Ghost Month.

Traditional lore says ghosts and spirits of deceased ancestors roam the earth during the month. While modern CEOs and investors may not believe in ghost stories, empirical evidence compiled by PhilEquity Management and published in PhilippineStar shows that August and September are usually down months with a strong correlation of negative returns.

Analyzing 25 years of PSEi monthly returns, PhilEquity analyst Antonio Samson and his team found that there is a 68% chance of stock losses in August and an expected 3.7% decline in prices. In September, he said there is a 52% chance of dropping at least 1.9%.

Samson says that, while the declines may be a result of Chinese Filipinos and others holding off on significant business decisions or investing, it could likely be because American and European fund managers go on their summer vacations in August.

July to September is generally the least robust period for the market because it coincides with the wet season in the Philippines, when typhoons and weather disturbances batter the country. Even well prepared businesses can see their bottom line hit by poor weather.

The drop may be all the more likely since analysts expect corrections for the market’s current overbought levels.

COL Financial chief technical analyst Juanis Barredo told press in early August, “The Philippine index proceeds to stand out and may be able to continue to outperform but it too may need to present occasional corrections to short-term support.” He expects the market to swing in and out of overbought levels.

No need to fear, if you believe a credit rating is near

Nonetheless, PSE President and CEO Hans Sicat believes a future credit rating upgrade for the Philippines is enough of an incentive to keep investors in the market.

The country is currently at par with Indonesia with a Standard & Poor’s credit rating of BB+, one notch below investment grade.

The good mark, which was earned in July, is the highest credit rating the Philippines has had in 9 years. Government leaders are heralding an upgrade to investment grade under the Aquino Administration.

Investment grade would likely usher in more investments since it is considered a stamp of approval for foreign investors making investment decisions.

“If you believe in the rerating story that there will be an upgrade, simply by staying in this market you are going to benefit by that rerating upwards once it happens. If you’re looking at Thailand or say Malaysia they are very solid countries but are they on the verge, on the cusp or rerating? The answer is probably a no,” said Sicat.

He added, “Even if you sat on [your investments dollars] the rerating will bring valuations up whereas in a country where in there is no chance at least in the medium term of having a re-ratings upgrade (you won’t get that same bump).”

Moreover, analysts say the PSEi has room to grow, compared to markets in other countries. 

COL’s Head of Research April Lee Tan told press in early August that the investment-to-GDP Ratio is only 22% in the Philippines, compared to Vietnam’s 39%, Thailand’s 26% and Indonesia’s 32%. “It just means that there is still a lot of investment potential in the country,” she said.

Fundamentally overpriced?

PSE President Hans Sicat believes looking at valuation through a high price-to-earnings ratio doesn’t tell the whole picture and points to the price/earnings to growth, or PEG ratio, which takes into account the growth in the local market.

“It’s expensive if you think of it historically. But is it expensive if you think the Philippine market is offering you a PEG of 1.5 times where as Europe is offering you perhaps negative?…As an investor I would probably say I can not afford not going to the Philippines, if those are my two choices. If I left it in Europe it would probably lower in value unless you have such a long-time horizon,” he stressed.

“Again [the PEG ratio] works to our favor because you probably won’t put your money in the eurozone or the U.S. because growth prospects are not very good. But you are probably likely to put your money in Asia and maybe the Philippines in particular because the growth prospects are [good],” he added.

AB Capital Securities Inc analyst Gregg Adrian Ilag takes the opposite perspective. “PSEi is still trading at 16-times-2012-earnings, which is a premium to historical valuations. Even with the current earnings growth, we think that valuations are a bit expensive,” he wrote in an August 17 report.

‘Bargain levels’

Ilag added that full year earnings growth for the basket of companies included in the PSEi would have to reach 53%, a tall order, to bring valuation to “bargain levels.”

“We advise investors to stay on the sidelines and wait for opportunities to buy fundamentally attractive stocks at lower prices. This strategy works well for both medium and long term investors,” he said.

Philequity’s Samson agreed. He said the ghost month in particular represents a “perfect windows of opportunity to buy more shares of [your] favorite companies at a discount.”

“The uptrend in the Philippine economy is still intact, and the reasons to remain bullish remain as valid today as in the past few months. As long as the opportunity presents itself, there may be stocks selling off without any reason, other than the dampening of market sentiment, albeit temporarily,” Samson said. – Rappler.com

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