Biggest Philippine Money Managers Brace for Stock Retreat

May 27, 2014 4:01 am ET

(Adds index closing performance in seventh paragraph.)

May 27 (Bloomberg) -- The three biggest Philippine money managers are bracing for a short-term retreat in stocks after five months of gains lifted valuations to the highest levels in more than a decade versus regional peers. The benchmark stock index declined today.

The Philippine Stock Exchange Index may drop as much as 4.3 percent to 6,500, Fitzgerald Aclan, a vice president in the money management unit of BDO Unibank Inc., which oversees about $18 billion, said in an interview. Metropolitan Bank & Trust Co.’s Allan Yu has been selling on days when the market rallies. Estelito Biacora, the chief investment officer at Bank of the Philippine Islands, is cutting positions in top performers while adding to laggards in consumer industries.

The price-to-earnings ratio for the Philippine equity gauge climbed to a 79 percent premium over the MSCI EM Asia Index this month, propelled by $959 million of inflows from foreign investors since December. That rally is now showing signs of faltering, with the Philippine index slipping 1.9 percent from its intraday high on May 20.

“I don’t think the premium will be sustainable,” said Biacora, who helps oversee about $14 billion in Manila. “We have been unloading a bit, reducing those stocks that have rallied a lot.”

The Philippine index has advanced 18 percent from an August low, approaching the 20 percent threshold that signals a bull market. The measure’s valuation climbed to about 21 times reported earnings, more than 30 percent higher than the five- year average. The MSCI EM Asia gauge trades at a multiple of 13, data compiled by Bloomberg show.

Foreign Inflows

“Had it not been for foreign buying, we would have corrected much sooner,” said Yu, a first vice president at Metrobank. “Foreign buying is expected to continue, but the market is in need of a breather.”

The Philippine Stock Exchange Index fell 0.2 percent to 6,780.26 at the 3:30 p.m. close of trading in Manila today, its third straight day of losses, the longest losing streak in four weeks.

All three money managers predict the retreat in stocks will be short-lived as the nation’s improving economic health lures overseas investors. The economy capped its biggest two-year expansion since the 1950s in 2013 as benchmark interest rates stayed at a record lows, while the government won a credit- rating upgrade from Standard & Poor’s this month.

As record infrastructure spending plans fuel projected economic growth of 7.5 percent, the index may rebound to 7,100 by the end of the year, according to Yu. He plans to buy consumer and property stocks to position for the rally.

Earnings Drop

“There will be a consolidation towards the 6,500 level in the near term, but the long-term bullish scenario remains intact,” Aclan said in a phone interview from Manila.

The Philippine index’s valuation is approaching a high of 22 times reported earnings reached in May 2013. The gauge lost more than 20 percent from that level through August amid concern that reduced bond purchases by the U.S. Federal Reserve would deter investors from buying emerging-market assets.

Companies in the benchmark index posted an aggregate 21 percent drop in first-quarter earnings, trailing analyst estimates by 3.2 percent, according to data compiled by Bloomberg. That compares with profit growth of 4.1 percent for the MSCI EM Asia index.

“In terms of valuation, we are among the most expensive in the region and the earnings we have seen indicate we are not due for upgrades yet,” Yu said. “Investors should ease up on stocks that have outperformed and are overvalued.”