Shunning pricey stocks, PSE investors willing to pay more

MANILA, Philippines - Investors are shunning concerns of high valuations, continuously pouring in money to the overvalued local bourse on the back of the Philippines’ “promising” economic story, an investment bank said. 

“The equity markets have clearly understood and maybe over-discounting, a little bit, the trend going forward,” said Christopher Eoyang, managing director for global economics, commodities and strategy research at Goldman Sachs.

“It is therefore incumbent for the government to deliver results,” he told reporters in a briefing on Thursday.

The Philippine Stock Exchange index (PSEi), which has hit 30 record-highs this year, is trading at 21 times price-to-earnings ratio— meaning investors are willing to pay 21 times more for every peso of future earnings.

The ratio, Eoyang said, compares to just six- to seven times in South Korea and eight times in China, which are larger economies than the Philippines. This makes local assets “expensive” versus other regional players.

At Goldman Sachs, Eoyang said they advise clients to be “underweight” in the Philippines, meaning to sell some local assets or avoid acquiring additional ones in the future, due to its high price.

“But the market is pretty happy. It’s much more story based (and) their focusing on tangible benefits of the Philippines right now. The story is a good one and people figure that out,” he explained. 

The Philippines, which grew by an above-target 6.6 percent last year, is projected to grow by a “decent” 5.5 percent this year and the next before picking up at 5.6 percent and 5.8 percent in 2015 and 2016, respectively. 

Strong growth will be backed by manageable inflation, projected to fall at 4.2 percent this year, before slowing down to 3.8 percent in 2014 and 3.5 percent for the succeeding two years, according to the bank’s estimates. 

Mark Tan, executive director at the bank’s global investment research, said portfolio inflows entering the stock market has already become one of the drivers of credit surpluses for the Philippines. 

On average, $273 million worth of shares have changed hands each day this year, up 854 percent from their 2005 levels. PSEi was also “crowded” with foreign inflows totaling $1.265 billion as of May. 

“We still think that the underlying picture is for inflows to persist and it will be supportive of peso appreciation,” Tan told reporters. The peso is seen to close the year at 38.70:$1 before firming up to 35:$1 next year. It will be back at P40 level in 2015.

While the over-all scenario has been positive so far, Eoyang warned that investors would be looking at long-term prospects and that any signs of a “policy mistake” from the administration could reverse the gains. 

Tan, for his part, urged the government to continue enacting structural reforms in infrastructure education, labor and productivity. Eoyang said “delays” would be acceptable for as long as the state does the right things. 

“Basically, they can have a short-term reaction (to delays). But the right algorithm in the Philippines, is every time the market dips, you buy it, right?” Eoyang explained.

“Generally what investors are worried about is doing something that is not to (their) benefit… That should really be a chunk of a story and then they go away. That (however) is a low probability for this administration,” he added.