The First Quarter 2015 Philippine Stock Market Report

Why Invest in Philippine Stocks?

Of the 18 countries we regularly monitor, the PSEi generated the fourth biggest return of 11% behind the MICEX, DAX and CSI300. Investors should have exposure in the Philippine stocks.

One can look at the Philippines like assessing a listed company for fundamental soundness and value.

In terms of profitability, the Philippines has the third highest GDP growth rate of 6.9% behind giants India and China. The economy will be driven by the weak peso (which stimulates spending of Overseas Filipino (OF) families contributing to around 20% of Gross National Income (GNI)) and low fuel prices.

In terms of financial condition, the Philippines has a debt to GDP ratio of 45.40% when many countries are already over-leveraged. The US has a debt to GDP ratio of 101%, China’s debt to GDP ratio including shadow-banking according to CNBC is 251% as of July 2014 and France and the UK’s debt to GDP ratios are a little over 90%.

In terms of value, well, there are three ways to look at this. In terms of PER, the PSEi is in the 20x Club, a club we coined for stocks markets with PERs of at least 20x. This includes the Nikkei225, JSE, IGBVL, FTSE, CAC and BOLSA. By looking at this metric alone, the PSEi is deemed overvalued, expensive and a stock market to avoid.

However, in terms of PEG, the PSEi is the fourth most favorable to invest in behind the CSI300, Nifty and KLSE. This is because of the Philippines’ strong GDP growth which offsets its membership in the 20x Club.

Lastly, the PSEi’s 21.86x PER is made expensive because of AC, AGI, ALI, BDO, BPI, DMC, EDC, GLO, GTCAP, ICT, JFC, JGS, MEG, MER, MPI, PCOR, RLC, SCC, SM, SMPH, TEL and URC. These stocks’ ttm (Trailing 12 Months) PER are over 16x. They are more expensive than AAPL, the biggest company in the world in terms of market cap. URC and JFC have the highest PERs of 53x and 50x, respectively. We don’t advise investing in these stocks at current prices. That is unless there is some significant development that will suddenly boost earnings from this day forth like PCOR’s RMP-2 program.

In fact, the PERs of the PSEi stocks in our 60-stock coverage average 25.71x. This is a lot more conservative than the PSE’s (Philippine Stock Exchange) 22.83x and Bloomberg’s 21.86x. Our PERs use average 2011 to 2015F EPS. Despite all of this, there is still value in the Philippine stock market.

Of our 60-stock coverage, there are 29 stocks trading below 16x PER. That is 48% of the coverage. Of this 29 stocks, we recommend 12 mid to big cap value-stocks as a portfolio even at 21.86x PSEi PER. At this point, we recommend a 50-50 asset mix of cash and stocks. There is minimal margin of safety these days, and the cash cushion will be our seatbelt, airbag, helmet and fire-suit in case of an “accident”.

If you ask what this accident is, to us it’s not the coming US interest rate hike or China’s slowdown and property sector. It’s our politicians. Nine out of ten officials are politicians, while the rest if there are any are public servants. This is the Philippines’ problem ever since we remember. Singapore and South Korea came from behind and surpassed us in nationwide development. Singapore is a bastion of urban showcase. South Korea has evolved in culture with its K-Pop and cinema.

As an analyst, one should not be infuriated, but this problem that persisted throughout our lifetime is just absolutely ridiculous! It’s a huge shame that these politicians even continue to run as senators, congressmen and presidents when there are farmers neglected, street-kids increasing in number and an MRT that does not work. This is the negative side we can say and one does not read in country equities reports.

This is also the importance of the 50-50 asset mix. It is protection against uncertainty at a high PSEi PER. Today’s conditions make us flimsily recall a Buffett quote that the best companies can still make money even though it is headed by a ham sandwich. Philippine growth through the private sector is humming and more than enough to generate investors strong returns in the long run. It will rise, and rise, it will.

Happy Easter Everyone!

PSEi 1Q15

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.