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Characteristics of a Perfect Investment

1 2

Attractive growth outlook Cheap valuations

Philippines has an Attractive LT Growth Outlook

1 2 3 4

Resilient consumer spending growth Conditions ripe for investment spending to grow Government ready and willing to spend Less vulnerable to external shocks

Resilient Consumer Spending Growth


Age-Sex Population Pyramid (in Millions)
80 70 60 50 40 30 20 10 0 8.0 6.0 4.0 2.0 0.0 2.0 4.0 6.0 8.0 Female Male

Favorable Demographics Population Growth Median Age Age 0 15 16 65 Above 65 1.9% 23 % of Population 34.6% 61.1% 4.3%

Source: CIA World Fact Book

Young and growing population to ensure continuous growth in consumer spending

Resilient Consumer Spending Growth


OFW Remittances (US$Bil)
25.0 20.0 15.0 15.0% 10.0 10.0% 5.0 0.0 2002 003 004 005 006 007 008 009 010 011 012 2 2 2 2 2 2 2 2 2 2 Source: BSP 5.0% 0.0% 6,000 4,000 30.0% 12,000 25.0% 10,000 20.0% 8,000

BPO Revenues (US$ Mil)


11,000 9,000 7,200 6,061 4,875

6.4%

3,257 2,420 2,000 1,475 0 20042005200620072008200920102011 Source: BPAP

OFW remittances and BPO revenues continue to increase. . .

Resilient Consumer Spending Growth


Daily Minimum Wages (in US$) Cambodia Vietnam Indonesia China Thailand 2.03 2.20 2.93 3.99 6.92

. . . thanks to the significant wage differential

Philippines
Taiwan Hong Kong South Korea Japan New Zealand Australia

9.36
19.69 28.87 30.71 64.86 66.53 123.71

Resilient Consumer Spending Growth


GDP and Consumer Spending Growth during Election Year

10.0

8.0

6.0

Mid-term elections to boost consumer spending in 2013

4.0

2.0

0.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 1H12 GDP *Source: NSCB Consumer Spending

Conditions Ripe for Investment Spending to Grow


30% 25% 20% 15% 10% 5% 0%

Investments to GDP

Numerous investment opportunities still available


Regional Investments-toGDP Ratio

19%

Country Philippines India Indonesia Malaysia Thailand Vietnam

Inv-to-GDP 19% 31% 32% 20% 26% 39%

Source: NSCB, COL estimates

Source: Bloomberg, BSP, NSCB, COL estimates

Conditions Ripe for Investment Spending to Grow Banking Statistics


(Universal & Commercial Banks)

Strong and liquid financial system


Capital Adequacy Ratio Minimum Requirement BSP Basel III (2014) 10.0% 12.5%

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%

Philippine Banks (1Q12)


Source: BSP

18.0%

2004 2005 2006 2007 2008 2009 2010 2011 3Q12


Source: BSP

Conditions Ripe for Investment Spending to Grow


16% 14% 12% 10% 8% 6% 4% 2% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg

10 Yr PDS T-F Rate at a Historic Low

14.4%

3.9%

Funding cost is very cheap

Government Ready and Willing to Spend


85 80 75 70 65 60 55.8 55 50 45 40
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20112012F 2013F

Debt to GDP
77.778.2 72.5 64.665.7 71.4 63.9 57 57.3 55.4 50.9 50.5

Government finances improving

48.0

Source: DBM

Government Ready and Willing to Spend


2013 Budget Highlights
Value (PhpBil) Total Revenues Total Spending Capital Outlay (Infrastructure) Economic & Social Services Debt Services 1,780.1 2,021.1 413.2 1,208.6 333.9 % Growth 15.0% 13.9% 35.7% 14.8% 0.2% Growth in capital outlay (infrastructure) and economic & social services spending to outpace growth in total spending 2013 budget passed on time Growth in revenues partly funded by the sin tax bill (+Php30 Bil)

Less Vulnerable to External Shocks

Source: NSCB

Without the Structural Problems of Developed Economies


Philippines vs. Developed Economies
USA % Population > 65 year old Population average age Household debt/disposable income Public debt/GDP Deficit/GDP 13.3% 37.1 107.9% 73.6% 7.0% Europe 17.9% 41.2 99.4% 82.5% 4.1% Philippines 4.3% 23.1 9.2% 50.6% 2.3%

Source: OECD Fact book, Fed, European Commission, Eurostat

However, Valuations are not Cheap


25

PSEi 12-Month Forward PE Band

20

18.5
16.4 14.3 12.2

15

10

0 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

PSEi Trading at the Upper End of its 10-Year Range

However, Valuations are not Cheap


Relative Valuation of Philippines vs. Other Markets
2012 PE 2013 PE

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%

Source: Bloomberg, COL Estimates

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

Europe Grexit did not materialize

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%

* The PSEis earnings yield based on 6,500

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

* Source: PSE, Bloomberg, BSP, COL estimates

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

20,000 15,000 10,000 5,000 0 -5,000 -10,000 -15,000

Weekly Mutual Fund Flows (YTD 13')

in US$ Mil

in US$ Mil

1/2/2013

1/16/2013 Equity Bonds

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

15.01 17.84 2.00 4.17

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.

Long Term Trend Still Up


Scenario Analysis: When will PSEi Reach 10,000?
Assumptions PSEi EPS Growth Forward P/E Years to PSEI 10,000 Implied CAGR
Source: COL estimates

Scenario 1 10% 14X 7.5 6.0%

Scenario 2 12% 16X 5 9.1%

Scenario 3 15% 18X 3 15.6%

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

Buy Below Price


130.00 5.70 12.15 41.75 22.90 97.40 23.25 3.48 330.00 3,043.00 8.45

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.

Keeping You Ahead.