One reason why I chose COL Financial is that I knew nothing about stocks and a personal money teacher suggested it to me. He said that COL is engaged personally with its clients. Apart from the reason that a newbie
could open a trading account cheaply with COL Financial (only PhP5,000.00 to
start), I was enticed to be its client mainly because of the idea that COL would act both as my stockbroker and financial mentor.
Apart from its usual daily
investments guides and technical analyses, it publishes a monthly report on how
the economy is doing. The report includes recommendations how clients must react on the economic circumstances to
increase the potential of earning or what to do to mitigate the risk of capital
loss.
This monthly report is called
COLing the Shots. Below is the excerpt of the their TUESDAY, 26 NOVEMBER 2013 report.
(PDF file can be downloaded from here)
The Perfect Storm Hits Philippine Equities
COLing the Shots is a monthly publication by COL which provides
insights on investment opportunities based on global and local developments
that could affect the market. COLing the Shots aims to provide timely and
relevant information and analysis as well as a model portfolio for successful
investing.
Key Highlights
• The PSEi has lost a total of
5.3% during the past five trading days as investor sentiment once again turned
for the worst due to the abundance of negative developments recently.
• Last November 8, the Philippines
was badly hit by super typhoon Yolanda. Because of the destruction brought
about by the typhoon, NEDA estimates that GDP growth could drop by 0.3% to 0.8%
this year while the BSP said that inflation might reach 3.2% for the whole of
2013 and 4.5% in 2014.
• Moreover, since the start of
September, around Php100 Bil in fresh equity was raised by
companies either through share
placements or IPOs. Despite this, there are still talks of
numerous capital raising activities.
Aside from siphoning off liquidity, capital raising activities are viewed
negatively because of the potential dilution that they could cause. Moreover,
companies usually price the shares being sold at a discount to their market
price.
• The recently concluded third
quarter earnings season was also generally unexciting. Only a handful of
companies delivered better than expected results. Moreover, SM and PGOLD, which
are part of the more resilient consumer sector, reported disappointing third quarter
earnings results.
• Finally, foreign investors
continue to sell the Philippine market as emerging market Asia
remains out of favor while developed markets remain in vogue. Starting June of
this year, foreign investors have been net sellers in the Philippines except for the month of
July. Foreign sell-off has intensified recently as a result of the negative
developments discussed earlier and as concerns of US Fed tapering once again
returned to the fore.
• Given all the negative
developments, it is difficult to justify a strong performance for the Philippines
equities market in the short term. However, we remain convinced that a bear
market will not happen anytime soon as the country’s favorable long term
economic growth outlook remains intact.
• The economic impact of typhoon
Yolanda over the long term should be minimal given that Eastern
Visayas , which was the hardest hit by the typhoon, accounts for
only 4.5% of GDP. Moreover, reconstruction spending which is estimated at
Php250 Bil to be spent over three years should act as an ‘offset’. Meanwhile,
although inflation will go up as a result of the typhoon, interest rates should
not go up as the Central Bank normally increases interest rates only if
inflation is driven by strong demand. Finally, among the listed companies that
we cover, only EDC, FPH and FGEN, were severely affected by the storm.
• As far as share offerings are
concerned, the impact should be favorable over the long term despite the
reduction of liquidity in the short term. Funds that were raised by companies
can be used to finance investments that will fuel long term earnings growth.
Liquidity, market capitalization and number of investible stocks of the
Philippine stock market should also grow as a result of the share offerings, allowing
our stock market to become bigger and more attractive to foreign investors.
• As far as the lackluster
earnings season is concerned, the causes for below expected results of listed
companies are generally soft patches that are not expected to last.
• While the Philippines is
suffering from contagion as Thailand and Indonesia continue to announce
disappointing economic growth and external account numbers, the same numbers
coming out of the Philippines remain very strong. Recently announced economic
statistics such as GDP growth, OFW remittances, BPO revenues, exports, foreign
direct investments and the country’s competitiveness ranking are all highly
favorable.
• As far as the US Fed tapering
is concerned, while this is the greatest risk facing the Philippine stock
market today, we believe that the worst is already priced in. Assuming that the
US 10year bond rate
stabilizes at 3.5%, while the Philippines ’
10-year T-bond rate climbs to 5.5% in response to the Fed tapering, our end
June 2014 target for the PSEi would be 6,450. The said level is still a premium
relative to where the market is today. Consequently, assuming that the PSEi
continues to drop, we should not be afraid to buy this market given that the
country’s long term fundamentals remain intact. We believe that 5,600 would be
a good level to start bargain hunting. At the said level, the PSEi would also
be trading at 14.4X 2014E P/E which is slightly below its 10-year historical
average P/E.
• In my January “COLing the
Shots” report, I already highlighted the risk of something like this happening
and I recommended setting aside some cash to capitalize on opportunities such
as these. While I believe that the sell-off that we are seeing today is an
opportunity to deploy cash, we should understand that 1.) It might take a while
for the market to recover as sentiment is hurt and as earnings surprises and
more compelling valuations are needed to convince foreign investors to return;
2.) With the negative sentiment prevailing and concerns that interest rates
would go up, there could be an opportunity for us to buy stocks even more
cheaply. As such, we recommend the adoption of a peso cost averaging strategy
in the deployment of cash. We also think it would be appropriate to increase
our required capital appreciation potential for stocks to 25% from 15%. The use
of borrowed money or margin is also not appropriate in this type of market.
• As a reflection of our more
cautious view of the stock market in the short term, we are adjusting the “Buy
Below Price” of stocks in our “COLing the Shots Model Portfolio” to reflect the
increase in our required capital appreciation potential. We are also removing
AGI from our portfolio. After AGI listed both its liquor subsidiary Emperador
and gaming subsidiary Travellers in the PSE, there is no compelling reason for
investors to own AGI as all three major earnings contributors (MEG, EMP and
RWM) are already listed in the PSE. Meanwhile, despite PGOLD below expected
earnings results, we are still maintaining it in our portfolio as we believe
that it is too soon to turn bearish on the stock.
Typhoon also hits Philippine equities
It has been a while since my last
”COLing the Shots.” Although the PSEi is only down by 3.1% compared to its
October 1 close of 6,194.56, it has actually lost a total of 5.3% during the
past five trading days as investor sentiment once again turned for the worst
due to the abundance of negative developments recently.
Last November 8, the Philippines
was badly hit by super typhoon Yolanda. Because of the destruction brought
about by the said typhoon, NEDA estimates that GDP growth could slow to 4.1% in
the fourth quarter from 7.6% during the first half of the year, while full year
GDP growth could drop by 0.3% to 0.8%. Meanwhile, the BSP said that inflation
might reach 3.2% for the whole of 2013 from 2.8% during the first ten months of
the year. It also said that inflation could climb to 4.5% in 2014.
Moreover, a lot of share
offerings took place during the past two months, siphoning off liquidity. Since
the start of September, around Php100 Bil in fresh equity was raised by
companies either through share placements or IPOs. Despite this, there are
still talks of numerous stock rights offerings or capital raising activities.
After BPI, PNB and RCB announced plans to conduct a rights offering to raise a
total of Php45.2 Bil, the market became concerned that other banks would follow
suit. There is also speculation that JGS will raise capital after it bought San
Miguel’s stake in Meralco valued at Php72 Bil and that SMPH would raise capital
after it announced a large capital expenditure plan. Aside from siphoning off
liquidity, capital raising activities are viewed negatively because of the
potential dilution that they could cause. Moreover, companies usually price the
shares that they sell at a discount to their market price.
The recently concluded third
quarter earnings season was also generally unexciting. Only a handful of
companies delivered better than expected results. Moreover, SM and PGOLD, which
are part of the more resilient consumer sector, reported disappointing third
quarter earnings results as SM’s retail business suffered from weak margins
while PGOLD reported disappointing revenue growth.
Finally, foreign investors
continue to sell the Philippine market as emerging market Asia (Thailand,
Indonesia and Philippines) remains out of favor while developed markets (US and
Europe) remain in vogue. Starting June of this year, foreign investors have
been net sellers in the Philippines
except for the month of July. Moreover, Philippines
together with Thailand and Indonesia have underperformed the US and European
markets during the past few months starting June this year. Foreign sell-off
has intensified recently as a result of the negative developments discussed
earlier and as concerns of US Fed tapering once again returned to the fore.
Headwinds to most likely lead to
lackluster performance in the short term, but long
term uptrend remains intact. Given
all the negative developments, it is clearly difficult to justify a strong
performance for the equities market in the short term. Most investors are
probably wondering if the weakness we are seeing today is just a phase or is it
the beginning of a bear market.
Despite all the bad news and the
fearful condition of the stock market, we remain convinced that a bear market
will not happen anytime soon as the country’s favorable long term economic
growth outlook remains intact.
Let’s analyze all the negative developments that are taking place,
starting with typhoon Yolanda.
The economic impact of typhoon
Yolanda over the long term should be minimal. Although the whole of Visayas
accounts for 12.5% of GDP, Eastern Visayas ,
which was the hardest hit by the typhoon, accounts for only 4.5% of GDP.
Moreover, reconstruction efforts should act as an ‘offset’. A few days ago,
NEDA director-general Arsenio Balisacan estimated the cost of rebuilding
typhoon-struck areas in the Visayas region at Php250Bil. This is equivalent to
approximately 2% of the projected 2013 nominal GDP. Funding should also not be
an issue given the government’s strong finances, low interest rates, and
willingness of development agencies to extend cheap loans. Although inflation
will go up as a result of the
typhoon, interest rates should not go up as the Central Bank normally increases
interest rates only if inflation is driven by strong demand and not shortage of
supply. Finally, only a few listed companies in our coverage list, namely EDC,
FPH and FGEN, were severely affected by the storm. Most said that the typhoon
would have little or no impact at all on their operations.
As far as share offerings are
concerned, the impact should be favorable over the long term despite the
reduction of liquidity in the short term. Note that bulk of the shares that
were sold during the recently concluded share offerings were primary shares.
This means that funds will be used by companies to finance investments that
will fuel long term earnings growth.
Liquidity, market capitalization and
number of investible stocks of the Philippine stock market should also grow as
a result of the share offerings. Note that the Philippine market is very small,
even compared to Indonesia
and Thailand .
(See Exhibit1) The improvement that will result from the numerous share
offerings should in turn should help the Philippine stock market attract more
foreign investors.
Exhibit 1: Comparison of
Different Equity Markets in Asia
No.
of Total Mkt Cap Ave.
Daily Value
Listed
Cos . (US$
Bil) T/O (US$ Mil)
Source:
Bloomberg
As far as the lackluster earnings
season is concerned, the causes for below expected results of listed companies
are generally soft patches that are not expected to last. Admittedly,
disappointing earnings results are strong catalysts for sell-offs. However,
assuming that the reasons for disappointing earnings results are only short
term in nature, investors would still consider buying stocks of companies with
disappointing earnings assuming that selloffs become overblown.
While the Philippines is suffering from contagion as Thailand and Indonesia continue to announce
disappointing economic growth and external account numbers, the same numbers
coming out of the Philippines
remain very strong. Recall that Philippine GDP growth reached 7.5% during 2Q13,
exceeding economists’ estimates. Not surprisingly, while the World Bank
downgraded its GDP growth forecast of Thailand
and Indonesia , it raised its
GDP growth forecast for the Philippines
from 6.2% to 7.0% this year. Moreover, growth of OFW remittances remains
strong, accelerating to 6.8% in August. The BPO industry is also well on its
way to meet its full year revenue target of US$16 Bil and end 2013 employment
target of 960,000 jobs according to the IT and Business Process Association of
the Philippines .
This implies a growth of 21% in terms of revenues and 23.5% in terms of
employment. Exports, which dropped by an average of 6.0% during the first five
months of the year, are also showing signs of recovery. In September, exports
increased by 4.9%. This was the fourth month that exports grew on a
year-on-year basis. Finally, investment spending is picking up as net FDI
inflows jumped by 123% in August bringing the eight-month tally to US$2.8 Bil,
up by 25.4% year-on-year. The recent upgrade of the Philippines to investment grade
rating and the significant improvement in the country’s competitiveness ranking
by 30 points to 108th should also ensure the sustainability of investment
spending growth.
As far as the US Fed tapering is
concerned, I would like to reiterate what I said during last month’s “COLing
the Shots.” While this is the greatest risk facing the Philippine stock market
today, we believe that the worst is already priced in. Assuming that the US
10-year bond rate stabilizes at 3.5% (at par with its average during the past
10 years), while the Philippines’ 10-year T-bond rate climbs to 5.5% in
response to the Fed tapering, our end June 2014 target for the PSEi would be
6,450. The said level is still a premium relative to where the market is today.
Admittedly, the PSEi’s upside
compared to the said level is not
that substantial. However, assuming that the PSEi continues to drop, we should
not be afraid to buy this market given that the country’s long term
fundamentals remain intact. 5,600 would be a good level to start bargain
hunting based on the requirement of a minimum capital appreciation potential of
15%. At the said level, the PSEi would also be trading at 14.4X 2014E P/E which
is slightly below its 10-year historical average P/E.
In summary, given all the
negative developments affecting the Philippine market today, it would be
difficult to expect a strong performance in the short term. However, neither do
we expect a bear market to take place given the country’s attractive long term
fundamentals.
Recommending cautious deployment of cash
In January, I came out with my
first “COLing the Shots” report for the year entitled “Sunny with a Chance of
Rain Storms” discussing the outlook for 2013. In my report, I already
highlighted the risk of something like this happening. I also recommended
setting aside some cash to capitalize on opportunities. (See a portion of the
report below)
“Although we expect the market to
go up (in 2013), we believe that it will be very volatile. . . There is
speculation that the Fed could start phasing out QE3 by as early as end 2013.
This would negatively affect the sustainability of the prevailing liquidity driven
market rally. There is also a risk that conditions in developed countries
improve significantly as governments succeed in addressing their economic
problems. If this happens, the Philippine stock market could suffer from
foreign fund outflows as foreign investors switch back to developed economies
where stocks are much cheaper compared to the Philippines . Negative surprises
could have a magnified impact on share prices since investors already have very
high expectations.
Given our expectation that the
market will be volatile, investors should keep a part of their portfolio in
cash. This would allow investors to capitalize on opportunities to buy stocks
cheaply assuming that the market is sold off due to external developments . . .
or if the market goes through a correction due to profit taking activities.”
I believe that the sell-off that
we are seeing today is the opportunity that we’ve been waiting for to deploy
cash. However, there are a few caveats.
It might take a while for the
market to recover. Given the volatility that we are seeing, it will take a
while for investor sentiment to recover. As far as catalysts are concerned, we
might need to see a few quarters of positive earnings surprises locally.
Valuations of developed markets also have to adjust for foreign investor
interest to return to the Philippine market (in other words, our relative
valuation has to become more attractive). As such, peso cost averaging is still
the preferred method to deploy cash to improve the average cost of stock
purchases. It is also not wise to use margin in this type of market.
Room to be more conservative.
With the negative sentiment prevailing and with concerns that interest rates
would go up, there is an opportunity for us to buy stocks even more cheaply. As
such, we think it would be appropriate to increase our required capital
appreciation potential to 25% from 15%.
COLing the Shots Portfolio – Removing AGI, adjusting “BUY below” prices
As a reflection of our more
cautious view of the stock market in the short term, we are adjusting our “Buy
Below Price” to reflect the increase in our required capital appreciation
potential to 25% from 15%.
We are also removing AGI from our
“COLing the Shots Model Portfolio.” Just recently, AGI listed both its liquor
subsidiary Emperador and gaming subsidiary Travellers in the PSE. As a result,
there is no compelling reason for investors to own AGI as all three major
earnings contributors (MEG, EMP and RWM) can be bought separately. Given the
44.8% increase in the share price of AGI since it was added it in our “COLing
the Shots Model Portfolio” in January of this year, we think now is a good time
to lock in gains.
Meanwhile, despite PGOLD below
expected earnings results, we are still maintaining it in our portfolio as we
believe that it is too soon to turn bearish on the stock. According to PGOLD,
revenues during 9M13 were negatively affected by the bad weather in August.
Moreover, despite PGOLD’s below expected 9M13 earnings results, profits for the
period still increased by 46.6%, the fastest pace among listed consumer
companies.
Exhibit 2: COLing the Shots Model
Portfolio
Current Price FV Buy
Date Buy Price Current Return Buy Below Price
EEI 9.88
13.00 30-Mar-12 6.07 62.8% 10.40
PGOLD 40.95 51.00
11-Jun-12 24.60 66.5%
40.80
MEG 3.30 4.78 11-Jan-13 3.11 6.1%
3.82
TEL 2,630.00
3,560.00 11-Jan-13 2,636.00 -0.2% 2,848.00
DNL 6.33
10.50 14-Feb-13 6.00
5.5% 8.40
RLC 21.00
30.00 5-Aug-13 22.70
-7.5% 24.00
AC 565.00
753.00 5-Aug-13 600.00
-5.8% 602.40
Head of Research
April Lynn Tan, CFA
Analysts
George Ching
Richard Lañeda, CFA
Charles William Ang, CFA
Kervin Sisayan, CFA
Jed Frederick Pilarca
Garie Ouano
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