THE Philippine Stock Exchange (PSEi) continued its upward trend in the first six weeks of the year. Bouyed by the strong recovery of the Philippine economy in the fourth quarter of 2014 and the sharp decline of inflation, the PSEi has reached 7,801 points or a growth of already above 7 percent in the first week of February.
At this level, it is only just 3 percent short of our conservative estimate of a 10 percent growth this year. People have began to ask—how far can it go? Are we rising too fast, too soon? These are valid questions considering that on the political front, the country is facing a serious challenge in relation to the peace process and a strong public sentiment against what happened in Mindanao.
In the past, issues much weaker than what we are currently facing will have already spooked the market. However, what we are seeing is that the market is discounting all these negative news. In fact, before the second address of the President last Friday, the market again reached another all time high. Do these current movements validate our assertion than the Philippine economy has reached a level of maturity that separates politics from its underlying fundamentals?
In our Eagle Watch briefing last January 22, we said that the Philippine economy in its base condition has already breached its generational growth of less than four percent. Sans government expenditures and a weak performance of the agriculture sector, the Philippine economy will already grow at about 5.5 percent. Compared to our Asean neighbours growth spurts in the 1990s, this is still slower. But considering the scenario of just following the normal business cycle, this is considered strong. This could drastically change when government expenditures increase again this year (most likely due to the revision of the DAP ruling) and as agriculture enjoys an El Niño-less year.
Moreover, the Philippine economy is just beginning to reap the benefits of the successive investment upgrades. Foreign direct investments (FDI) probably hit more than $6 billion last year and again poised to increase further this year. In fact, the last three years has seen the return of Japanese investments in the country. Mitsubishi has established a vehicle manufacturing plant, not an assembly plant, in Santa Rosa (this was the same plant that was inaugurated by the President during the arrival of the slain Special Action Forces personnel).
Foreign investment houses are also looking at the Philippines beyond its politics but at the core of its uniqueness in its economic structural—remittances and business process outsourcing. These are indeed confidence building scenarios that cannot be undone by politics quickly.
These are fundamental bases that provide upward traction to the stock market that counts and discounts news on a daily basis. The current level of the market already puts it at an expensive 19 times price-earnings ratio, much higher than Thailand’s 14 times and Indonesia’s 17 times. But all three are reflecting faster pace of market growth at this early stage of the year.
Definitely, these three markets are being aided by uncertainties in the global markets particularly what is happening in the Euro zone. Compared to that region, these three economies are far better in managing their internal finances. Nonetheless, among the three, the Philippine stock market stands out. These last few weeks have seen strong net foreign buying and that have been pushing up the peso close to the 44.00 range. These are signs indeed of strong confidence.
Overall, we can say that indeed the Philippine economy as mirrored by the Philippine stock market has extricated itself from being seen as a fragile investment destination. This way, it has allowed investors to look at its long term fundamentals and structural uniqueness separate from its political challenges. All the current data are pointing to it benefiting from a global investment adjustment and benefiting more from investment upgrades in the perspective of investment quality.
Although it can be said that the market is already expensive, there remains some upside since investors are waiting for the full year reports of major companies that could help cement perspectives and confidence for 2015 and beyond. At some point, there will be expected weakness within the year to pause from its high points and this is not because of politics. Nonetheless, we see that the stock market will start taking politics into consideration once the election month comes closer. As it is, the announcement of candidacies by October will be a good gauge to see if really the market has separated itself from politics.
Alvin Ang