philippines to toe the line april

Philippines to “Toe The Line”

An idiomatic expression meaning to

conform to a rule - Wikipedia

The PSEi went

ahead of itself

during 1H13…


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


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


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


10 Yr- Bond Rate vs. Inflation Rate of BBB Rated Countries

Source: Bloomberg

Philippines Too Low

Too High

Peso Continues to Weaken


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


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


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


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...


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


…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


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%


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


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


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


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


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


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


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


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


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


S&P 500 (2003 - 2005)

Source: Bloomberg


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

philippines to toe the line april

Economy & Finance