Maintaining a growth streak for six consecutive years, the Philippines Stock Exchange’s (PSE) momentum is expected to continue into 2015, thanks to projected gains from cheaper oil prices and a strong growth outlook among dimming prospects in the region.
The benchmark PSE index (PSEi) surpassed the 7,500 mark for the first time ever in January, after climbing 23% over the past year. The Manila index then proceeded to briefly rise above 7,700 points at the end of January after the Southeast Asia country announced its economy grew 6.9% year-on-year in the fourth quarter, far exceeding analyst expectations and making it one of the top performers in the region.
Falling oil prices are also set to create a boom for the Philippines, which imports more than 90% of its energy, making it potentially one of the biggest winners from lower prices. At the same time, the PSEi’s strong base of non-oil stocks, a series of IPOs expected before 2016 and strong corporate earnings, are all set for it to sustain its winning streak.
With its predominant real estate, financial and utilities constituents − and a lack of energy and materials companies − the index has had one of the longest stretch of gains among equity indexes worldwide, rising every year since 2009.
Falling oil prices’ favourable impact on consumer spending should boost consumer stocks with the sector accounting for 75% of the nation’s economy. Of the 10 most expensive stocks in the Philippines index, seven are consumer or consumer-related companies.
Security Bank’s SB Peso Equity Fund has an estimated 20% of its $46m fund in consumer stocks, after notching up a return of nearly 50% last year. The nation’s second-best performing fund, Alpha Opportunity Fund managed by ATR Kim Eng Asset Management, has consumer companies such as Philippines second flag carrier, Cebu Air, as one of its top picks.
The index is supported by strong macroeconomic fundamentals and rising foreign investment. Foreigners purchased a net $1.26bn in shares in 2014, lured by improved economic growth. The latest World Bank estimates put GDP growth at 6.5% in 2015 and 2016. The government has a more ambitious target of 7%- 8% for this year.
Meanwhile, President Benigno Aquino’s efforts to improve tax collection and reduce corruption earned the nation investment grade status from Fitch Ratings, Moody’s and Standard & Poor’s (S&P) in 2013 and from South Korea-based National Information and Credit Evaluation (NICE) Ratings in 2014: "The outlook is positive. It reflects the improved growth potential backed by institutional reforms and greater investment in infrastructure," NICE Ratings said in its latest report on the Philippines in September.
Growth is expected to be aided by strong consumer and business sentiment, depressed oil prices and rising foreign direct investment (FDI), which reached a record $4.88bn during the first nine months of 2014.
The peso is expected to remain under pressure in 2015 against the dollar, due to the normalisation of US monetary policy, which is likely to benefit stocks that earn in dollars according to analysts. “Year 2015 will also be a good foreign exchange play, as the expected depreciation in peso would benefit dollar-revenue generating companies such as those in the mining, electronics and oil sectors,” said BDO Unibank chief market strategist Jonathan Ravelas.
Accordingly, economist year-on-year growth projections for the PSEi in 2015 range between 11-16%, while index constituents are expected to report earnings increase of 16% in 2015 compared to a projected 1.1% increase for stocks on the MSCI Asia Pacific Index according to data compiled by Bloomberg.
IPOs on the cards
With growth expected to remain strong in 2015, IPOs are likely to feature strongly over the next 12 months. According to PSE President, Hans B. Sicat, at least 10 IPOs will take place in 2015, following the successful 2014 debut of five companies.
Real estate developer DoubleDragon Properties raised P1.16bn ($26m) when it listed in April, with share prices nearly quadrupling by December, while technology company Xurpas raised P1.37bn ($31m) when it listed in December 2 with its share prices doubling in just three weeks. This followed a move by the PSE to simplify its structure in 2013 as part of an effort to encourage small- and medium-sized enterprises to list on its SME board.
In separate news, Sicat said in January that plans to open a sub-index of shariah-compliant companies have been put on hold due to costs related to the launch. The PSE had aimed to launch the Islamic sub-index in 2014, with the hope to provide the exchange with a share of the $1.5trn funds provided by Muslim investors.
But the PSE is still seeking growth, with officials looking to neighbouring Japan and its companies, which have been building their presence in the auto, financial and retail segments in the Philippines. As part of a roadshow in January, about 150 executives of Japanese companies were briefed on economic growth in the Philippines in a bid to encourage Japan to invest in the nation’s capital markets. “Quite a number of Japanese companies have offices and facilities in the Philippines, and we would like to apprise them of the developments in our capital markets as well as urge them to tap the Exchange for funding requirements,” said Sicat.