Morgan Stanley Sees Philippine Stocks Rallying - Best Economy Indicator

Philippine (PASHR) stocks, Asia's most expensive equities, may rise a further 25 percent this year as the economy grows, according to Jonathan Garner, Morgan Stanley's chief Asia and emerging-market strategist.

The Philippine Stock Exchange Index (PCOMP) rallied 23 percent in 2012 to a record yesterday, the world's fifth-best performer, amid government plans to boost spending while narrowing the budget deficit. The gauge's valuation of 16.4 times estimated earnings is the highest of 15 Asian Pacific markets tracked by Bloomberg and is approaching the biggest premium to the MSCI Emerging Markets Index since November 2006.

Standard & Poor's increased the country's debt rating on July 4 to BB+, the highest level since 2003 and one step below investment grade. The endorsement helps President Benigno Aquino as he boosts spending to a record this year and seeks $16 billion of investment in roads, bridges and airports. JG Summit Holdings Inc. (JGS) and Ayala Corp. have led stock advances this year on speculation the government's investment plans will boost consumer demand.

"The Philippines has a strong economic story and considerable external balance strength," Hong Kong-based Garner said in an e-mail yesterday. "We expect Philippine equities to continue to perform well."

Aquino plans to narrow the budget shortfall to 2 percent of gross domestic product by 2013 from a target of 2.6 percent this year. The government has stepped up efforts to catch tax evaders and smugglers, and has drawn up bills aimed at increasing revenue to narrow the fiscal deficit.

Growth Forecast

The $200 billion economy grew 6.4 percent in the first quarter, the fastest pace since 2010. Aquino is aiming for an expansion of as much as 8 percent annually to cut poverty. That's more than double the International Monetary Fund's 3.5 percent growth forecast for the global economy this year.

Shares of JG Summit, owner of the nation's biggest budget airline, climbed 38 percent this year, and Ayala (AC), owner of the largest homebuilder, jumped 54 percent. JG trades at 16.5 times estimated profit, while Ayala is valued at a multiple of 23, data compiled by Bloomberg show.

"The Philippines has a lot of things going for it: a reform-minded government, good GDP growth," Herald Van Der Linde, Hong Kong-based head of Asia Pacific equity strategy at HSBC Holdings Plc, said in e-mailed comments yesterday. "This allows the market to remain at elevated valuation levels for some time. But it is also Asia's most expensive market. The rally might cool."

HSBC has an underweight rating on Philippine equities with a year-end target for the benchmark index of 5,350. The gauge fell 0.1 percent to 5,362.68 at today's close after rising to a record yesterday (July 5, 2012).

Morgan Stanley London

Investment Grade

S&P's move to raise the Southeast Asian nation's debt rating to BB+ follows that of Moody's Investors Service which upgraded the nation's rating outlook in May to positive, citing improving debt levels. Moody's still ranks the $200 billion economy at the second-highest junk level. Fitch Ratings raised its assessment to one step below investment grade last year.

Standard Chartered Plc recommended in a report last month that clients buy the peso via the non-deliverable forwards market, saying it expects the Philippines to achieve an investment-grade rating by 2014.

The peso is up about 5 percent against the dollar in 2012, the best performer in a basket of 11 major Asian currencies tracked by Bloomberg, as foreign investors purchased $1.78 billion of Philippine shares this year.

"There are funds who invest taking into account a country's credit rating status," said Allan Yu, who helps manage about $9.39 billion at Manila-based Metropolitan Bank & Trust Co. "Some funds move ahead before a market reaches investment grade status, which could happen for the country next year, so we could see more foreign inflows."

Bond Sale

A higher investment grade reduces the cost of borrowing for the country and its companies, Yu said.

The Philippines plans to boost global bond sales to $3 billion in 2013 from this year's $2.25 billion target to fund spending on roads, airports and social services, Finance Undersecretary Rosalia de Leon said in an interview yesterday.

The Philippine index's estimated price-to-earnings ratio of 16.4 times is 19 percent higher than the average since Bloomberg began tracking the data in 2006. The Shanghai Composite Index (SHCOMP), the largest emerging-market gauge by value, trades at 9.6 times earnings, about half its historical average, the data show. The MSCI Emerging Markets Index is valued at 10.2 times.

Morgan Stanley has the equivalent of a hold recommendation on Philippine stocks because valuations are above long-term average levels at a time when some other markets trade at discounts.

"We are equal weight, which, given there is 25 percent upside to our year-end target price of 1,210 for the MSCI EM index, means we should see something similar for the Philippines," said Morgan Stanley's Garner.


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