By DANIEL INMAN
The stock market in the Philippines has shot up nearly 19% this year, making it one of Asia's top performers for a second year. But some investors are getting nervous about chasing further gains.
The explosive speed of the rally, driven largely by foreign funds rushing in for a piece of the fastest economic growth in Southeast Asia, has caught analysts by surprise and left the market looking costly.
The local benchmark index, the Philippines PSE Composite, is trading at 16 times predicted annual earnings, making it nearly twice as pricey as South Korea's Kospi Index at 8.3 times expected earnings and more than twice as dear as Hong Kong's Hang Seng Index."Our view is the valuation is getting stretched and caps the upside from here," said Arthur Kwong, head of Asia Pacific Equities at BNP Paribas Investment Partners, which manages €58 billion ($71 billion) of assets in Asia.
"There are a lot of things that we like in the Philippines, except one thing: It is the most expensive market in the region," said Herald van der Linde, Asia Pacific equity strategist at HSBC in Hong Kong, which advises investors to hold less Philippines assets in a fund portfolio than dictated by the major benchmark indexes.
Cracks already are appearing, as the Philippines, after outperforming for much of the year, is now slipping back. The PSE index is down 3.4% from a record reached earlier this month and on Thursday fell 31.18 points, or 0.6%, to 5189.37.
Its neighbors are catching up, with Thailand now up 18% and Vietnam climbing 22%, Asia's top-performing index. On a global ranking, only Venezuela and Egypt have beaten these Southeast Asian markets that have benefited from accelerating growth, credit-ratings upgrades and partial insulation from Europe's woes.
The Philippine peso, too, which had rallied as much as 4.6% this year against the U.S. dollar, making it Asia's best-performing currency, has also slipped back.
Much of the enthusiasm for the Philippines stems from President Benigno Aquino III's moves to clean up corruption, reign in the budget deficit and boost spending on crumbling roads, train systems and airports by partnering with private companies. With first-quarter growth at an annualized 6.4% rate, the second-best in Asia after China, some fund managers are sticking with their investments.
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"The underlying fundamentals of the economy are improving," said Aira Gaspar, chief investment officer at Manulife Financial in Manila, which has $1 billion of assets under management locally. "We are still positive on our medium-term view."
The ratings companies have also rewarded the government's efforts with a string of credit-rating upgrades. Standard & Poor's this month raised its long-term rating to BB+ from BB, still in the "junk" category but just one notch below investment grade, which allows global pension funds and other large investors to buy the country's debt. The central bank on July 7 said it deserves a higher rating.
"The next step would be to give a clear sign that we are heading toward a balanced budget," said Jose Vistan, associate vice president for research at AB Capital Securities in Manila. "That would be a significant step that could cause an upgrade."
But even the prospects for an upgrade aren't enough to keep international funds from retrenching from a market that many investors believe has topped out. Southeast Asia's checkered history of political instability is also a concern, some say. Global funds tracked by EPFR pulled money out of the Philippines' stock market in May for the first time in 2012, as the euro zone's debt crisis worsened. Outflows were also recorded in June, although at a much slower pace.
One warning sign that investors in the Philippines are heeding is the change in sentiment over Indonesia. Last year, Indonesia garnered huge enthusiasm as investors poured money in to capture its consumer- and commodity-led boom. This year, the interest has ebbed. Foreigners have pulled out $2 billion from Indonesia's government bond market, pushing down the rupiah and sapping strength from the country's stock-market rally.
"Philippines has been the darling of many emerging-market fund managers this year...as it was one of the rare positive stories out there," Adrian Zuercher, senior investment strategist at Credit Suisse Asset Management, which managed 403.4 billion Swiss francs ($413 billion) globally as of the first quarter of 2012. "We are now at a point where, to attract new money, it will be hard" because the market went up too much and too quickly, added Mr. Zuercher.
Edited By Cen Fox Post Team
