FMAP Convention Key Takeaways #4

Testing the Market’s Resilience

Rafael Garchitorena, Strategist at Deutsche Regis Partners, Inc. presented the outlook for the Philippine equities market. Mr. Garchitorena started by painting a picture of the local macroeconomic scene, showing that the Philippines continues to experience strong economic growth. For 2015, domestic demand has accelerated every quarter, and the boost in consumption during election years should contribute to growth this year. Benign inflation, low yields, and a solid external position also contribute to the strong Philippine economic fundamentals.

Mr. Garchitorena then discussed possible risks to the Philippine economy. With regard to concerns on the Middle East remittances, while growth has slowed down in 2015, the impact of low oil prices far outweigh the risks to remittances. As pointed out in the presentation, the Philippine import bill was down to $8Bn in 2015 from $14Bn in 2012, with the $6Bn drop equivalent to total Middle East remittances. As for the impact of Philippine elections, while the results will not have much of an impact in the short-term, Mr. Garchitorena said that the long-term impact will be reflected in government spending, investments, and capital formation growth depending on who wins the presidential race.

Moving to the equities market, Mr. Garchitorena commented that corporate earnings have continued to disappoint despite the strong economy. While valuations have come off from recent highs, the PSEi is currently just trading slightly above the long-term P/E ratio, indicating that there is still room for the index to go down before value emerges. Foreigners have been shifting funds away from emerging markets including the Philippines, allowing local market players to pick up the slack. Nonetheless, volumes have also dwindled, causing volatile movements in the price. As for the Philippines’ position in the investment cycle, Mr. Garchitorena mentioned that the market is currently halfway between bearish and bullish territory. Local and global developments over the next few months should provide some indication as to where the balance will tilt.

Mr. Garchitorena then ended with a discussion on sector picks, sharing overweight calls on power, consumer/retail/media, and telecoms, a neutral stance on property, and negative outlooks for gaming and banks.

by: Charlton Sean Gaerlan