YEARENDER: Market posts solid run; index marks historic highs

MANILA, Philippines - The raging bull roared back with a vengeance, marking a historic rampage that sent the main benchmark index breaking through record highs 38 times this year on the back of the country’s sound economic environment, resilient remittances, reduced fiscal deficit, and robust corporate earnings.

The Philippine Stock Exchange index (PSEi) has had a solid run, galloping 33 percent this year to close higher for the fourth consecutive year. This was a far cry from the 4.1-percent growth recorded by the PSEi in 2011.

The PSEi finished at 5,812.83 on the last trading day of the year, making it one of the best performing indices in Asia Pacific and the world. The PSEi just lagged behind Thailand’s 36.3 percent. It posted its last all time close on Dec.26 at 5,832.30.

The record setting pace was driven largely by foreign funds rushing in for a piece of the fastest economic growth in Southeast Asia.

Net foreign buying in the stock market from January to September surged more than six-fold to P95.21 billion from P15.61 billion in the same period in 2011 as more offshore investors bought into the Philippine growth story.

Global fund managers have dubbed the Philippines the newest tiger economy of Asia with the country posting the strongest growth.

The local economy – measured by the rise in the gross domestic product – grew 6.5 percent in the nine months ending September 2012, outperforming its peers in the Asean region. The stellar performance was attributed to the explosive growth in the service sector led by offshore outsourcing firms that rode on Asia’s only English-speaking population.

Cuts in interest rates and the government’s hardline efforts to pump-prime the economy through increased infrastructure spending likewise boosted investor confidence in the Philippines.

The Philippines, with a large and young population, has become the most favored destination of firms looking for cheap outsourcing. It is the 12th most populated country in the world with over 100 million people, majority of which ready to enter the workforce.

Much of the enthusiasm for the Philippines is also brought about by President Aquino’s resolve to stamp out corruption, enforce good governance and narrow the budget deficit.

The PSEi’s bullish performance was also attributed to the bourse’s move to extend trading hours until 3:30 p.m. starting January 2012 to align trading hours with that of other bourses in the ASEAN region.

Capital raising at the PSE hit an all time high P203.5 billion as of end-November this year, surpassing the bourse’s P197-billion target as the bullish investor sentiment that propelled the market to unprecedented heights encouraged a number of companies to either go public or widen public ownership. The amount exceeded the full year 2011 figure of P107.5 billion, which was previously the highest total amount raised in a single year.

Five firms went public this year, same number as last year. Among these include GT Capital Holdings (the listed flagship firm of financial services tycoon George S.K. Ty), the Gotianun-led East West Banking Corp., controversial agribusiness firm Calata, Coal Asia Holdings and D&L.

Several firms likewise underwent follow-on offerings led by San Miguel Corp.’s issuance of P80 billion worth of preferred shares, the country’s biggest share sale to date.

Total value turnover for the nine-month period reached P1.31 trillion, up 25 percent from the previous year’s figure and nearly exceeding the full year 2011 figure of P1.42 trillion.

The combined market capitalization of listed issues in the PSE at the end of the nine-month period rose 28.5 percent to P10.54 trillion from P8.2 trillion.

It was a strong year for both the financial and holdings sectors, which outperformed the index. Properties, consumer and power moved along with the PSEi while the services, industrial and mining turned in a disappointing. Mining issues faced a setback following the enactment of a mining law.

Corporate developments on casino and gambling interests and acquisitions as well as talks of backdoor listings boosted market activity, driving the index to never before seen levels.

Prospects for 2013

Skeptics say the odds are high and mounting against the bull market living much longer. Investors are nervous about chasing further gains as the PSEi is trading 17 times predicted annual earnings, making it Asia’s most expensive stock market.

PSE president Hans Sicat, however, believes that the stock market may still have enough steam to sustain its positive momentum in 2013, saying the country’s strong economic fundamentals and its re-rating story will drive the market higher.

“I think a lot of investors are positioning and waiting for our own re-rating upward,” Sicat said.

Investors’ focus has turned to the Philippines as the next potential candidate in Asia to receive investment grade rating. The Aquino Administration hopes to reach investment grade status sometime in 2013 as it seeks to further lower debt interest payments and attract more foreign investments to boost job creation.

Sicat noted that even without hefty foreign fund inflows, the market is supported by local investors who account for 55 percent of the total trades. Data from the PSE show that Filipino investors snapped up more than P939 billion worth of shares up to Dec. 14.

Foreigners used to dominate the market with a 60 to 70 percent share.

While it expects the economy and corporate earnings growth to remain strong, COL Financial sees lower returns in 2013 compared to the previous year. “I am not expecting a repeat of our stellar 2012 performance. It would be difficult to justify an even higher premium given that the PSEi is already trading at a significant premium compared to other markets globally,” COL Financial said.

COL Financial sees the marketing hitting 6,100 by the end of the year on the assumption that corporate profits will rise 12.5 percent.

Arlysa Narciso of AB Capital Securities said the economic backdrop remains resilient and 2013 is expected to be another strong year with the PSEi seen rising at least 10 percent to end at 6,390.

“With the influx of foreign funds into the market, we can be assured of the confidence and optimism in both our economy and the market. The government has also set the foundation of a strong economy. We expect this year’s accomplishments to be the stepping stones towards becoming an economic powerhouse in the Southeast Asia come 2013,” Narciso said.

Sicat expects a healthy pipeline of companies raising new or additional capital at the PSE. “I think both IPOs and follow-on should be good next year because of the general environment. With valuations relatively high, I think that most companies would probably need to conduct equity fund-raising as part of their strategy. If you don’t, you are underutilizing the value of your shares because you are not going to the market to monetize it, and knowing how cycles go, obviously it’s best to sell shares at a high cycle for the same shares you get a higher valuation than in a down cycle,” he said.

Next year’s fund-raising activity will see the listing of exchange-traded funds. At least six major banks have signified interest to list their ETFs.