philippines to toe the line

8/12/2019 Philippines to Toe the Line

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Philippines to Toe The Line

An idiomatic expression meaningto

conform to a rule - Wikipedia


3/47

The PSEi went

ahead of itselfduring 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


4/47

Brought About By Ample Liquidity ConditionsPhilippines 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

20125M13

% Change

-177.2%

140.1%

164.8%

6.6%

69.5%109.4%

Php Bil

-5120

54

58

9872


5/47

Fed minutes noted that a

number of participants

expressed willingness to

reduce QE as early as June

Prospects to Reduce Liquidity TriggerSell-off in May

Timeline of News on Tapering ofUS 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 inJanuary

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


6/47

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


7/47

Valuations not yet

cheap relative toearnings growth,

other markets &

historical average

Relative Valuation of Global Markets

Philippines

ThailandVietnam

Malaysia

Indonesia

USEurope

India

China

2014 10-Yr-AveP/E

P/E EPSGrowth

16.3 6.4% 14.911.7 8.0% 13.911.5 11.2% 16.2

15.6 9.5% 15.5

13.4 12.5% 18.0

14.9 9.6% 16.212.5 29.0% 13.8

14.8 8.4% 18.7

7.9 19.8% 20.7

Source: Bloomberg

Normalization Process Not Yet Over


8/47

Interest rates stillhave 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

1/30/2009

4/30/2009

7/31/2009

10/30/2009

1/29/2010

4/30/2010

7/30/2010

10/29/2010

1/31/2011

4/29/2011

7/29/2011

10/31/2011

1/31/2012

4/30/2012

7/31/2012

10/31/2012

1/31/2013

4/30/2013

7/31/2013

10/31/2013

1/31/2014

US vs Phil 10 YearUS 10 Year

PH 10 Year

Spread


9/47

y = 0.6979x + 3.1317R = 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

InterestRate

Inflation Rate

Interest Rates Still have Room to IncreaseNormalization Process Not Yet Over

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

Source: Bloomberg

PhilippinesToo Low

Too High


10/47

Peso Continues to WeakenNormalization 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)


11/47

Lackluster YTD Performance of Fragile Five + ThailandWeakness of Other EM Economies

Source: Bloomberg

Stock marketIndex %

Change

USD ExchangeRate %

Change

10-YrBond Rate Basis

PointChangeEnd

20133-Feb End

20133-Feb End

20133-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


12/47

Bad News Locally

Negative News

o Lackluster 3Q13 earnings season

o Typhoon Yolanda to pull down GDP growtho Soft spots in 4Q13 GDP data

Constructions spending down 0.5%

Government spending down 5.2%


13/47

Current Market Weaknessan 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 overlookedo Higher rates already priced in

o Stocks are currently the most attractive peso investment instrument

available


14/47

-9.7

-3.6

-2.1

-3.8

0.21.2

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 SentimentAre Noise

Source: Bloomberg

Current Account Balance (% GDP)

Strongcurrent account balance makes Philippines less vulnerable to the

impact of US Fed tapering


15/47


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 GDPo Php361 Bil recovery and reconstruction spending from 2013 to

2017 to act as an offset


16/47

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


17/47

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 projectso Spending on social and

economic services to

increase faster


18/47

Abundance of Favorable EconomicDevelopments 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)

1,4752,420

3,2574,875

6,0617,200

9,000

11,00013,000

16,000

0

2,000

4,000

6,000

8,000

10,000

12,00014,000

16,000

18,000

2004200520062007200820092010201120122013E

To fuel consumer spending growth and ensure strong current account position

Source: BSP


19/47

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

14.018.9

-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


20/47


Weak Peso is Favorable

o Additional spending power of families dependent on OFW

remittanceso Improves Philippines competitiveness as an exporter and

BPO destination


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Drivers of Investment Spending

o Strong and resilient domestic consumption

o Credit ratings upgradeso Improving competitiveness of the Philippines

o Strong and liquid financial system


23/47

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 4.24.6

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)


24/47

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-11Ba1 Oct-12

Baa3 Oct-13


25/47

Minimum Wages & Wage Hikes


Source: Various newspaper reports

Current Minimum Wage

Rate HikeLocalCurrency

US$/Day

Thailand BT 300/day 9.6+35% y/y effective2012-2013

IndonesiaIDR 2.2 Mil/

Mo8.8

+40% y/y in Jakarta2013

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


26/47


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


27/47

Strong and liquid

financial system


Source: BSP

NPLRatio

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%


28/47

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%


29/47

Comparative Yield of Different Asset Classes

Stocks are Currently the Most AttractivePeso Asset Class Available

*The PSEis 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 historicalaverages


30/47

Comparison of Different Investment Products

Stocks are Currently the Most AttractivePeso Asset Class Available

Investment

InstrumentPositives 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


31/47

PSEi EPS Growth and P/E Multiple Estimates

Stocks are Currently the Most Attractive PesoAsset Class Available

PSEi at 6,000Source: COL estimates

Fundamentals to eventually catch up with price

EPS Growth P/E (X)

2014 6% 16.4

2015 14% 14.4


32/47

Negatives

Summary of Factors Affecting the Market

o Philippine stocks are

not yet cheap relative

to other marketsglobally

o Interest rates have

room to increase

oPeso could still weaken

Positives

o Nothing fundamentally

wrong with the

Philippineso Higher interest rates

already priced in

o Stocks remain the most

attractive peso asset

class


33/47

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 marketsglobally

o Interest rates have

room to increase

oPeso could still weaken

Positives

o Nothing fundamentally

wrong with the

Philippineso Higher interest rates

already priced in

o Stocks remain the most

attractive peso asset

class


34/47

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% divyield)


35/47

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

latero 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


36/47

Peso Cost AveragingIs 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)


37/47

Peso Cost AveragingIs 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


38/47

COLing the Shots Model Portfolio

Stock Picks Adding BDO, MBT, ALI & SMPHRemoving PGOLD and RLC

CurrentPrice

FV Buy DateBuy Below

Price

EEI 10.00 12.70 30-Mar-12 11.04

MEG 3.74 4.54 11-Jan-13 3.95TEL 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


39/47

New Stock PicksBDO (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


40/47

New Stock PicksALI (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


41/47

New Stock PicksSMPH (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.


42/47


43/47

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


44/47


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).


45/47

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


46/47


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 2004high of 1,158)


47/47

COL FINANCIAL

HELPING YOU LIVE

RICHER LIVES.

For more information visit

www.colfinancial.com

philippines to toe the line

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