philippines to toe the line april
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Philippines to “Toe The Line”
An idiomatic expression meaning to
conform to a rule - Wikipedia
The PSEi went
ahead of itself
during 1H13…
Philippines to “Toe The Line”
21.2
0.0
5.0
10.0
15.0
20.0
25.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
PSEi Trailing P/E Band
Source: Bloomberg
… Brought About By Ample Liquidity Conditions
Philippines to “Toe The Line”
10-Yr Bond Rate
Source: Bloomberg
7%
3%
0%
4%
8%
2011 2012 2013
Net Foreign Buying in the PSE
Source: Bloomberg
2008
2009
2010
2011
2012
5M13
% Change
-177.2%
140.1%
164.8%
6.6%
69.5%
109.4%
Php Bil
-51
20
54
58
98
72
Fed minutes noted that a
number of participants
expressed willingness to
reduce QE as early as June
Prospects to Reduce Liquidity Trigger Sell-off in May
Timeline of News on Tapering of US Fed Bond Buying Program
Fed announced it would
start to taper its bond-
buying program from
US$85 Bil to US$75 Bil a
month beginning in
January
Fed announced it would
taper its bond-buying
program further to US$65
Bil a month beginning in
February
MAY 22 DEC 18 Jan 29
Normalization
process not yet
over
Sell-off Continues
Weakness of
other emerging
market or EM
economies
Bad news
locally
Factors Negatively
Affecting the
Philippine Market
Valuations not yet
cheap relative to
earnings growth,
other markets &
historical average
Relative Valuation of Global Markets
Philippines
Thailand
Vietnam
Malaysia
Indonesia
US
Europe
India
China
2014 10-Yr-Ave P/E
P/E EPS Growth
16.3 6.4% 14.9
11.7 8.0% 13.9
11.5 11.2% 16.2
15.6 9.5% 15.5
13.4 12.5% 18.0
14.9 9.6% 16.2
12.5 29.0% 13.8
14.8 8.4% 18.7
7.9 19.8% 20.7
Source: Bloomberg
Normalization Process Not Yet Over
Interest rates still
have room to
increase
Normalization Process Not Yet Over
Spread of Philippines and US 10-Yr Bond Rates
Source: Bloomberg
2.7
4.1
1.4
0
2
4
6
8
10
1/30
/200
9
4/30
/200
9
7/31
/200
9
10/3
0/20
09
1/29
/201
0
4/30
/201
0
7/30
/201
0
10/2
9/20
10
1/31
/201
1
4/29
/201
1
7/29
/201
1
10/3
1/20
11
1/31
/201
2
4/30
/201
2
7/31
/201
2
10/3
1/20
12
1/31
/201
3
4/30
/201
3
7/31
/201
3
10/3
1/20
13
1/31
/201
4
US vs Phil 10 Year US 10 Year
PH 10 Year
Spread
y = 0.6979x + 3.1317 R² = 0.7988
0.00
2.00
4.00
6.00
8.00
10.00
12.00
-2.00 0.00 2.00 4.00 6.00 8.00 10.00 12.00
Inte
rest
Rat
e
Inflation Rate
Interest Rates Still have Room to Increase
Normalization Process Not Yet Over
10 Yr- Bond Rate vs. Inflation Rate of BBB Rated Countries
Source: Bloomberg
Philippines Too Low
Too High
Peso Continues to Weaken
Normalization Process Not Yet Over
Peso is weaker by 10.1% compared to start of 2013
Source: Bloomberg
45.013
40
42
44
46
1/2/2013 4/2/2013 7/2/2013 10/2/2013 1/2/2014
PHP:USD (2013-present)
Lackluster YTD Performance of “Fragile Five” + Thailand
Weakness of Other EM Economies
Source: Bloomberg
Stock market Index %
Change
USD Exchange Rate %
Change
10-Yr Bond Rate Basis
Point Change End
2013 3-Feb End
2013 3-Feb End
2013 3-Feb
67,802 63,284 -6.7% 2.15 2.24 -4.1% 10.18 9.96 -22
46,256 44,437 -3.9% 10.52 11.09 -5.4% 7.91 8.70 79
51,507 46,964 -8.8% 2.36 2.41 -1.9% 13.20 13.43 23
21,171 20,261 -4.3% 61.80 62.54 -1.2% 8.83 8.71 -12
4,274 4,384 2.6% 12,171 12,194 -0.2% 8.45 9.07 62
1,299 1,280 -1.4% 32.70 32.76 -0.2% 3.93 4.00 7
5,890 5,908 0.3% 44.40 45.33 -2.1% 3.50 4.05 55
Turkey
South Africa
Brazil
India
Indonesia
Thailand
Philippines
Bad News Locally
Negative News
o Lackluster 3Q13 earnings season
o Typhoon Yolanda to pull down GDP growth
o “Soft spots” in 4Q13 GDP data
• Constructions spending down 0.5%
• Government spending down 5.2%
Current Market Weakness an Opportunity to Accumulate Stocks
Reasons to be Bullish Over the Longer Term
o Most factors hurting investor sentiment are noise
o Abundance of favorable economic developments merely overlooked
o Higher rates already priced in
o Stocks are currently the most attractive peso investment instrument
available
-9.7
-3.6 -2.1
-3.8
0.2 1.2
3.1
-6.1 -5.5
-2.4
-5.4
-2.8
-0.4
2.8
-7.2 -6.8
-3.6 -4.4
-3.7
-1.5
4.2
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Turkey South Africa Brazil India Indonesia Thailand Philippines
2011 2012 2013
Philippines Fundamentally Stronger than other EMs
Most Factors Hurting Investor Sentiment Are Noise
Source: Bloomberg
Current Account Balance (% GDP)
Strong current account balance makes Philippines less vulnerable to the
impact of US Fed tapering
Most Factors Hurting Investor Sentiment Are Noise
Impact of Typhoon Yolanda to be Minimal
o Impact on 2014 GDP growth is only 0.3% (NEDA)
o Eastern Visayas accounts for only 4.5% of GDP
o Php361 Bil recovery and reconstruction spending from 2013 to
2017 to act as an offset
Construction to Benefit from 35%
Growth of Infrastructure Spending in 2014
Most Factors Hurting Investor Sentiment Are Noise
Source: DOF, DBM, NEDA
2013E 2014E 2015E 2016E Infra Spending (Php Bil) 295 399 601 835
% Change 24% 35% 51% 39%
% GDP 2.5% 3.0% 4.0% 5.0%
Infrastructure Spending
Government Spending to Increase by 13% in 2014
Most Factors Hurting Investor Sentiment Are Noise
Source: Bloomberg
Expenditure 2013 2014 % change Social Services 699.4 841.8 20.4%
Economic Services 509.2 593.1 16.5%
General Public 347.3 362.6 4.4%
Services 360.4 377.6 4.8%
Debt Service 89.5 89.5 0.0%
Defense 699.4 841.8 20.4%
Total 2,005.8 2,264.6 12.9%
o Removal of PDAF only
reduced budget by Php3.2 Bil
(0.14% of original proposed
budget)
o Bulk of the Php25 Bil
proposed budget for PDAF
realigned to calamity funds
and other projects
o Spending on social and
economic services to
increase faster
Abundance of Favorable Economic Developments Merely Overlooked
OFW Remittance
Source: BSP
OFW Remittances and BPO Revenues Remain Strong. . .
6.1%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
0.0
5.0
10.0
15.0
20.0
25.0
200220032004200520062007200820092010201120122013
BPO Revenues (US$Mil)
1,475 2,420 3,257
4,875 6,061
7,200 9,000
11,000 13,000
16,000
02,0004,0006,0008,000
10,00012,00014,00016,00018,000
2004200520062007200820092010201120122013E
To fuel consumer spending growth and ensure strong current account position
Source: BSP
…While Exports Rebound...
Abundance of Favorable Economic Developments Merely Overlooked
Exports (% Growth)
Source: NSO
-2.7
-15.6
0.1
-11.1
-0.8 4.1 2.3
20.2
5.1
14.0 18.9
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13
Abundance of Favorable Economic Developments Merely Overlooked
…Weak Peso is Favorable
o Additional spending power of families dependent on OFW
remittances
o Improves Philippines’ competitiveness as an exporter and
BPO destination
FDI and Manufacturing Sector Showing Signs of Strength
Abundance of Favorable Economic Developments Merely Overlooked
Net FDI 10Mo 2013, Mfg full year (nominal) Source: BSP, NSCB
FDI (US$Mil) % Change Mfg GVA (PhpBil) % Change
2011 1,816.0 39.9% 2,047.6 6.1%
2012 2,797.0 54.0% 2,171.0 6.0%
2013* 3,361.4 35.3% 2,350.4 8.3%
Abundance of Favorable Economic Developments Merely Overlooked
Drivers of Investment Spending
o Strong and resilient domestic consumption
o Credit ratings upgrades
o Improving competitiveness of the Philippines
o Strong and liquid financial system
Strong and Resilient Domestic Consumption
Drivers of Investment Spending
Source: NSCB
o Resilient OFW remittances
o Growing BPO sector
o Young and growing
population
Drivers: 6.0
4.4 4.2 4.6
3.7
2.3
3.3
5.7
6.6
5.6
4.6
0.0
2.0
4.0
6.0
8.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Domestic consumption Average
Domestic Consumption (% Growth)
Philippines Upgraded to Investment Grade in 2013
Drivers of Investment Spending
Ratings Agency Rating Upgrade Date Fitch BB+ Jun-11
BBB- Mar-13
S&P BB Nov-10
BB+ Jul-12
Outlook from "stable" to "positive"
Dec-12
BBB- Apr-13
Moody's Ba2 Jun-11
Ba1 Oct-12
Baa3 Oct-13
Minimum Wages & Wage Hikes
Drivers of Investment Spending
Source: Various newspaper reports
Current Minimum Wage Rate Hike Local
Currency US$/Day
Thailand BT 300/day 9.6 +35% y/y effective 2012-2013
Indonesia IDR 2.2 Mil/
Mo 8.8
+40% y/y in Jakarta 2013
Philippines Php466/day 10.7 +2.3% y/y in Manila 2013
Philippine labor cost
now more competitive
with that of neighbors
due to significant wage
hikes of neighboring
countries
Drivers of Investment Spending
Most Improved for Doing Business
o According to World Band and International Finance Corp.’s “Doing
Business 2014” report
o Ranking improved by 30 points to 108th out of 189
Source of Improvements:
o Less requirements to obtain construction permits
o Improved access to credit information
o Easier to pay SSS contributions
Strong and liquid
financial system
Drivers of Investment Spending
Source: BSP
NPL Ratio
Provision/ NPL
Loans/ Deposit
Loans/ Deposit + SDA
2010 2.9% 118.3% 62.6% 49.1%
2011 2.2% 126.4% 68.4% 50.9%
2012 1.9% 141.5% 71.6% 53.9%
11M13 2.4% 132.3% 60.8% 49.9%
Banking Statistics (Universal & Commercial Banks)
Capital Adequacy Ratio Minimum Requirement BSP 10.0%
Basel III (2014) 10.0%
Philippine Banks (3M13) 18.9%
PSEi Targets Under Different Interest Rate Scenarios
Higher Rates Already Priced In
Source: COL estimates
PSEi Target Base Case Bear Case 10-yr Bond Rate assumption
5.0% 5.5%
End 2014 6,900 6,600
% Upside from 6,000 15.0% 10.0%
Comparative Yield of Different Asset Classes
Stocks are Currently the Most Attractive Peso Asset Class Available
*The PSEi’s earnings yield based on 6,000
Stocks Time Deposit SDA 10-Yr-T-Bond
6.0% 0.85% 2.0% 4.1%
Due to low interest rates, stocks remain the most attractive peso asset
class even though valuations seem expensive compared to historical
averages
Comparison of Different Investment Products
Stocks are Currently the Most Attractive Peso Asset Class Available
Investment Instrument Positives Negatives
Bank Deposits Very liquid Low yield; High risk of losing purchasing power
Money Market Fund
Liquid Interest income is not paid out to investors
Yields higher than bank deposits Yields still below inflation; High risk of losing purchasing power
Bonds
Higher yields, especially for longer dated bonds
Bond prices drop in response to higher interest rates
Prices of longer dated bonds are more sensitive to interest rate movements
Stocks
Returns are higher compared to other asset classes over the LT
Highly volatile, especially in the ST
Not sensitive to rising rates over the LT
Dividend yield of some stocks are higher than bond rates
PSEi EPS Growth and P/E Multiple Estimates
Stocks are Currently the Most Attractive Peso Asset Class Available
PSEi at 6,000 Source: COL estimates
Fundamentals to eventually catch up with price
EPS Growth P/E (X) 2014 6% 16.4
2015 14% 14.4
Negatives
Summary of Factors Affecting the Market
o Philippine stocks are
not yet cheap relative
to other markets
globally
o Interest rates have
room to increase
o Peso could still weaken
Positives
o Nothing fundamentally
wrong with the
Philippines
o Higher interest rates
already priced in
o Stocks remain the most
attractive peso asset
class
Negatives
Summary of Factors Affecting the Market
Conclusion: Although stocks will
most like stay here in
the ST, they will
continue to go up in the
LT.
o Philippine stocks are
not yet cheap relative
to other markets
globally
o Interest rates have
room to increase
o Peso could still weaken
Positives
o Nothing fundamentally
wrong with the
Philippines
o Higher interest rates
already priced in
o Stocks remain the most
attractive peso asset
class
“Buy Now” or “Buy Later”?
Buy Now
Positives: o No possibility of missing out
Negatives: o Opportunity cost of capital
o Possible ST losses
o Emotional impact of ST losses or
“prospecting”
Prospect theory explains why people would rather place money in SDAs (2%) than buy PLDT stocks (7% div yield)
“Buy Now” or “Buy Later”?
Buy Later
Positives: o No opportunity cost of capital
Negatives: o Nobody knows the bottom
o Prices may be significantly higher
later
o “Anchoring” bias might cause
investors to miss out
Technical BUY signal (+40% from low)
Anchoring bias explains why most investors did not buy the PSEi in 4Q09 despite the technical BUY signal
‘Peso Cost Averaging” Is a Good Compromise
Peso Cost Averaging Strategy
o Buy only a fixed value of stocks in a period of time
o Buy only when thresholds are hit (ex., “buy below price”)
Positives:
o Limits the amount of exposure
o Improves average buying price assuming stock prices continue to drop
o Creates discipline, removes “emotions” out of investing (prospecting,
anchoring)
‘Peso Cost Averaging” Is a Good Compromise
Peso Cost Averaging Strategy
Risks are no longer significant
o Higher rates already priced in
o Stocks remain the most attractive peso asset class
“COLing the Shots” Model Portfolio
Stock Picks – Adding BDO, MBT, ALI & SMPH Removing PGOLD and RLC
Current Price FV Buy Date Buy Below
Price EEI 10.00 12.70 30-Mar-12 11.04
MEG 3.74 4.54 11-Jan-13 3.95
TEL 2,648.00 3,260.00 11-Jan-13 2,834.78
DNL 6.95 9.10 14-Feb-13 7.91
AC 525.50 689.00 5-Aug-13 599.00
BDO 79.50 94.00 23-Jan-14 81.74
MBT 76.80 100.00 23-Jan-14 87.00
ALI 26.15 36.08 23-Jan-14 31.37
SMPH 14.82 19.41 23-Jan-14 16.88
New Stock Picks BDO (Php79.50, FV: Php94.00) MBT (Php76.80, FV: Php100.00)
o Prices have corrected to attractive levels
o BDO now at 1.6X 14E P/BV while MBT now at 1.4X 14E P/BV
o Rising interest rates will only hurt banks’ trading income
o Demand for loans remains robust
o BDO and MBT are less dependent on trading income to generate profits
given their large size
New Stock Picks ALI (Php26.15, FV: Php36.08)
o Property prices and demand for properties are not expected to weaken
despite higher interest rates
o Steep decline in prices of property companies an opportunity to buy,
with ALI now trading at 38% discount to NAV, wider than its historical
average discount of 26%
o ALI is expected to deliver among the faster earnings growth despite its
larger size
o Other strengths include its huge landbank and numerous rental
properties
New Stock Picks SMPH (Php14.82, FV: Php19.41)
o A hybrid consumer and property play
o Despite its larger size post merger with other SM property companies,
around 60% of revenues and 70% of EBIT in the next few years will still
come from rental income
o Larger size provides numerous advantages over the LT such as the
ability to roll-out large-scale master planned mixed use developments
and more financing options
o Valuations are also attractive, with SMPH trading at 20.1X 14E P/E vs.
consumer sector average of 27.4X and 31% discount to NAV.
New Stock Picks Removing PGOLD and RLC
PGOLD
o Stock could underperform the market as valuations are no longer
attractive
o Stock trading at 23X 14E P/E, earnings growth to slow to 13% in 2014
from 36% in 2013
RLC
o We still like the company but we feel that ALI is a better play
o RLC’s earnings growth is expected to be slower compared to ALI
since its portfolio is more defensive, largely comprised of mall and
office rental properties
It Pays To Think Long Term
S&P 500 (1993 – 1995)
Source: Bloomberg
400
450
500
550
First rate hike on Feb 4, 1994. Total
of 6 rate hikes (+2.5% on Fed fund
rate) over the next 10 months.
1 year consolidation of the S&P
It Pays To Think Long Term
S&P 500 (1993 – 2001)
Source: Bloomberg
400
800
1600
Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01
First rate hike Following the 1994 consolidation, S&P rallied
from 1995 to 2000, reaching a peak of 1,527 in
March 2000 (up 217% from its 1994 high of 482).
900
1000
1100
1200
1300
Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05
First rate hike on June 30, 2004. Total of
17 rate hikes (+4.25% on the Fed fund
rate) over the next two years.
April 20, 2004, Fed hints that
it will raise Fed fund rates
soon.
5 1/2 months consolidation of the S&P
It Pays To Think Long Term
S&P 500 (2003 - 2005)
Source: Bloomberg
It Pays To Think Long Term
S&P 500 (2003 - 2008)
Source: Bloomberg
800
1000
1200
1400
1600
Jul-03 Jul-04 Jul-05 Jul-06 Jul-07
Hint of first rate hike
Following the 2004 consolidation, S&P
rallied from 2005 to 2007, reaching a peak
of 1,565 in Oct 2007 (up 35% from its 2004
high of 1,158)
COL FINANCIAL HELPING YOU LIVE RICHER LIVES.
For more information visit
www.colfinancial.com
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