The First Quarter 2013 Philippine Stock Market Report

May Everyone Benefit

The PSEi was all up in 1Q13.  The only significant downtrend was when the Cryprus debt ordeal erupted in March.  However, the PSEi regained its composure to surge before the Holy Week break on the back of Fitch’s upgrade of the Philippines to investment grade.  The euphoric high target set in the 4Q12 report of 6,792 was breached by around 1% three times to around 6,870 in March 2013.  We are pleased with that accuracy.  Our euphoric high target was breached two times before Cyprus and then after the Fitch upgrade at the end of the quarter.  Following the decline in the Philippine 10YTN in February 2013, the PSEi Bands were updated upward with a euphoric high of almost 8,000.  This will be the guide until 3Q13.

PSEi 1Q13

As of today, the PSEi is trading at 22.3 x ttm PER and 19.87x 2009-2013F PER of our 53-stock coverage.  These are way above the 16x PER mark or norm separating bargain and expensive stocks and markets.  Since 1996, the PSEi collapsed and fell deep three times when it breached 20x ttm PER.  They were in the Asian crisis, January 2000 and February 2002.  Should we quake in our boots?  No.  Unlike before, interest rates have gone down significantly.  The Philippine 10YTN is at its lowest in the last 50 years.  We are pleased.  This is incredible from an equities standpoint.  We are also impressed how attacking the heart of corruption by a president who means well would lead everything to this.

There is more.  Investment grade will usher and spur more investments to the Philippines.  In our last article on the Philippine economy, industry is in the backseat of the economy driven by the services sector.  Well, that is very obvious because power capacity in the Philippines is just enough in Luzon and less adequate in the Vismin region.  There are plants by TA/AC, AP/MER, AP, AC, FGEN, PERC and EDC (when EDC gets their act together) coming online mostly in 2016 to increase capacity for industry (and BPO and the new malls as well).  GNP growth of 6-7% should be maintained in a span of a decade to become a tiger economy, a Thomasian “tiger” economist said.  We concur.  There were lots of surprising criticisms after the investment grade upgrade that it only trickles down to the poor and the average man.  These critics are mistaken.  Investment grade is not a magic wand to alleviate the Philippines’ problems.  It is a big step and one of the many steps the country and its people still have to take to become a tiger economy.

There are also criticisms that the Philippines is very expensive.  It definitely is if one keeps on buying JFC, ALI, URC, ICT, TEL, SMPH, MER,  BPI, GMA7, SM, EDC, PX, SCC, GLO, RLC, BDO, PCOR, AT, AC, MWC, MBT, SMDC and DMC.  That is in order of the most expensive to the least expensive.  They all have minimal upside and caused the average PER to shoot up.  Do you know that these stocks are trading at a huge premium to the biggest company in the world in terms of market cap??  It’s not only the biggest company, but it has solid fundamentals as well.  It has sustainable growth, a hoard of fans and followers all over the world, hefty margins, a huge cash hoard, a tsunami of a cash-flow and a rock-solid balance sheet.  Its charismatic and inspirational co-founder also passed away from cancer in 2011 and was replaced by the effective management team he left behind.  Our advice to investors, especially foreign investors coming into the Philippine market, is to “Think Different”.  You’re not doing much work and maximizing your portfolio’s strength just because you came into the emerging market of the Philippines by buying those usual stocks mentioned above.  The Philippine market is more than those.

In light of that prickly last sentence, we come to the real winners of this stock market rally, the small investors.  Big funds are constrained by a volume requirement and cannot buy just any stock because of this even though a particular stock pick is great.  Small (and medium-sized) investors can buy any great stock from third-liners to big cap stocks with value.  They can position at great prices way before the big funds strap their big positions in.

The success of third-liner stock SGI came about when it offered quality affordable mobile phones under the MyPhone brand to the neglected C and D market.  In 2011, SGI sold 40% of the new mobile phones sold that year beating Apple, Samsung, LG, BB and the rest.  Its most affordable (but cute) mobile phone of PHP700 (USD17) is enhanced by a fake money scanner, an add-on to make the phone attractive even though it is low-priced.  This can be helpful to a Sari-Sari store owner or market vendor.

The point of this is that there is also a C and D market of investors of Philippine stocks.  Stock brokerage firms and funds are not capitalizing on this huge market with an innovative way to pool its resources into value stocks to create wealth.  The main reason is that, let’s face it, the average man still sees the stock market as a glorified casino.  Now the PSE has pushed up efforts to improve the market’s image and integrity.  Good luck, really, because the average man’s not yet buying.  By that we mean the small “retail” investors who deserve wealth creation as much as the big funds do.  A stock brokerage firm or a fund backed up by effective research and not a rumor and charting machine can tap into the C and D market’s huge potential.  In droves, retail investors can help drive the market where it’s supposed to go, and that is up.  May everyone benefit from the rally, A, Big, C and D.

Disclaimer

The Philippine Stock Market Research report is solely for information. It should not be constituted as an offer for solicitation for the purchase or sale of securities mentioned. The information herein has been obtained from sources believed to be reliable. Whilst every effort has been made to ensure accuracy, we do not guarantee the accuracy or completeness of the report. All opinions and estimates expressed herein constitute our judgment as of this date made on a reasonable basis and are subject to change without notice. No liability can be expected for any loss arising from the use of this report or its contents. As this is general information, it does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may obtain this report.