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Resilient consumer spending growth Conditions ripe for investment spending to grow Government ready and willing to spend Less vulnerable to external shocks
Favorable Demographics Population Growth Median Age Age 0 15 16 65 Above 65 1.9% 23 % of Population 34.6% 61.1% 4.3%
6.4%
Philippines
Taiwan Hong Kong South Korea Japan New Zealand Australia
9.36
19.69 28.87 30.71 64.86 66.53 123.71
10.0
8.0
6.0
4.0
2.0
0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12 GDP *Source: NSCB Consumer Spending
Investments to GDP
19%
NPL Ratio
1997 1998 1999 2000 2001 2002 2003 4.7% 10.4% 12.3% 15.1% 17.3% 15.0% 14.1% 12.7% 8.2% 5.7% 4.4% 3.5% 3.0% 2.9% 2.2% 2.1%
Provision/NPL
47.3% 38.3% 46.6% 43.6% 45.2% 51.2% 53.0% 60.4% 77.5% 82.6% 93.3% 100.0% 112.3% 118.3% 126.4% 136.0%
18.0%
14.4%
3.9%
Debt to GDP
77.778.2 72.5 64.665.7 71.4 63.9 57 57.3 55.4 50.9 50.5
48.0
Source: DBM
Source: NSCB
20
18.5
16.4 14.3 12.2
15
10
0 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Philippines
Thailand Vietnam Malaysia Indonesia US Brazil Russia India China
Source: Bloomberg, COL Estimates
18.7
11.5 11.5 15.5 17.3 14.2 21.0 5.9 16.3 12.5
18.4
13.9 10.9 15.4 14.3 13.7 11.2 5.8 15.7 10.5
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Global Markets Rallying since June 2012. . .
Comparative Performance of Global Markets
140 Nikkei 225 33.5% 130 120 110 100 90 80 May Jun Jul Aug Sep Oct Nov Dec Jan SH Comp, 2.1% Euro Stoxx 50, 23.5% PSEi, 29.0%
S&P500, 16.0%
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
. . . Driven by Ample Liquidity and Improving Risk Appetite
Key developments boosting liquidity and risk appetite
ECB announced that it would buy an unlimited amount of government bonds with maturities of between one and three years, alleviating concerns of a liquidity crisis ECB cuts key rates by 25 basis points Greece and Spanish banks received bailout
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
USA Fed announces QE3 US escapes fiscal cliff Debt ceiling suspended Indicators point to continuous recovery of the economy
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
China Banks' reserve requirement ratio cut twice by a total of 100 basis points Benchmark rates cut twice by a total of 56 basis points for 1-yr lending and 50 basis points for 1-yr deposits Floor for lending cut twice by a total of 20 percentage points to 70% of the benchmark rate Indicators point to the bottoming out of the economy
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Japan Government disclosed aggressive stimulus plan Inflation target doubled to 2% Open ended asset purchases Fiscal stimulus package of 10.3 Tril Yen
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Philippines BSP cuts rates four times for a total of 100 basis points SDA rate cut by another 50 basis points this year GDP growth surprises positively
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
No Signs that Interest Rates will go up in 2013 Inflation remains benign (3.2% in 2012 vs. 3.0% to 5.0% target) Economic condition of developed countries remain fragile Concerns on the appreciation of the peso
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
SDA to be Removed? BSP paid ~ Php68 Bil in interest on SDA in 2012 (lost Php78 Bil in 10M12) 50 basis point cut in SDA last January came as a surprise BSP considering the possibility of imposing reserve requirement on trust products (including SDAs) To potentially release Php1.6 Tril worth of liquidity into the system
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Stocks Remain the Most Attractive Asset Class
Comparative Yield of Different Asset Classes Stocks* 5.5% Time Deposit 2.0% to 3.0% SDA 3.0% 10-Yr T-Bond 3.9%
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Time Deposit Rates
PSEi Traded at Higher Valuations before Peaking in 97, while Interest Rates were also Higher
30 25 20 15 10 5 0
PE Band ('94-'12)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
9.3 11.5 11.2 12.7 9.1 8.0 9.5 5.0 5.3 6.3 5.2 4.9 3.4 4.1 2.7 3.1 2.9 2.9
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Global Risk-on Trade Still in the Early Stages
Yearly Mutual Fund Flows (07'-12')
400,000 300,000 200,000 100,000 0 -100,000 -200,000 -300,000 2007 2008 2009 Bond 2010 2011 2012 Equity
in US$ Mil
in US$ Mil
1/2/2013
1/30/2013
Source: ICI
Nevertheless, Ample Liquidity and Improving Risk Appetite will Continue to Push Market Higher
Global Risk-on Trade Still in the Early Stages
USA S&P 500 P/E (Today) S&P 500 P/E (10-yr Ave) 10-Yr Bond Rate (Today) 10-Yr Bond Rate (07')
Source: ICI
Volatility to Remain
Global Economies and Markets Still Face Numerous Risks Fed could phase out QE3 starting the end of the year European economy still expected to get worse in 2013 China remains vulnerable to weakness in developed economies given its large dependence on exports
Volatility to Remain
Philippines could suffer from foreign fund outflows assuming that the economic outlook of developed countries improve significantly given cheaper valuations of foreign stocks
Negative surprises could have magnified impact on share prices since investors already have very high expectations
Strategy
Stay Invested, Think Long Term Philippines LT fundamentals are attractive Fundamentals will eventually catch up with valuations Set Aside Some Cash, Use Long Term Money To capitalize on opportunities created by selloffs. We recommend a buy on dips strategy. To protect against volatility.
Stock Picks
COLing the Shots Model Portfolio
Stock
MBT MPI EEI PGOLD SMPH BDO AGI MEG MER TEL DNL Source: COL estimates
Current Price
115.00 5.23 13.10 38.00 18.88 87.85 20.65 3.78 305.00 2,850.00 6.76
FV
149.00 6.55 14.00 48.00 26.35 112.00 26.75 4.00 380.00 3,500.00 9.75
Summary
Despite the PSEis seemingly unattractive valuation, we think there is room for prices to go up. The Philippines has a positive long term outlook and boasts of relatively attractive fundamentals globally. Interest rates will also most likely remain low for the rest of the year, sustaining the prevailing liquidity driven rally. However, we expect to see a lot of volatility. The economic condition of developed countries remains very fragile as these nations continue to face numerous challenges. We could also witness a pickup in foreign selling in the Philippines as foreign investors switch to cheaper market globally.
Summary
We advise investors to stay invested in the stock market to take advantage of its favorable long term outlook. However, it would be wise to set aside some cash. Volatility could create opportunities to buy stocks cheaply. Also, use long term cash as a protection against volatility. Stocks that we like include MBT and BDO among the banks, PGOLD, SMPH and DNL as consumer plays, AGI as a consumer and tourism plays, MPI as an infrastructure play, and MER and TEL as dividend plays. We also like EEI and MEG, although we would only be buyers on pullbacks as valuations have gone up too significantly.