Bullish on the Philippines

Trading activity in the Philippines hit a fresh high yesterday with total turnover of $655 million, more than triple the average daily turnover during the first quarter.

That is paltry compared to Hong Kong or Korea, but highlights an impressive performance for a country that was once the basket case of the region. Indeed, the Philippines still ranks 138th in the World Bank’s Ease of Doing Business Index, alongside Sierra Leone and below India. But investors don't seem to mind, inspired by a market that only seems to move higher.

The benchmark share index is up 21% so far this year, after rising more than 30% during 2012. And, as with Malaysia last year, companies in the Philippines are taking advantage of the bullish environment to raise capital. Once again, Southeast Asia is the place to be.

“Investors are bullish on the Philippines, and so are we,” says Glenn Levine, a Moody’s analyst who described the country as “Asia’s rising star” in a report published on Tuesday. “The Philippines has been among the brightest parts of a generally gloomy global picture. Even with China’s economy slowing, the US struggling to gain traction and Europe stuck in a long-running crisis, the Philippines economy has continued to drive forward.”

Equity capital markets activity surged during the first quarter as some of the country’s biggest tycoons have piled into the market, including a $792 follow-on from Lucio Tan’s consumer conglomerate LT Group, a $350 million follow-on and sell-down in GT Capital by the Ty family and a $298 million top-up placement from the Ayala’s property arm.

Yesterday’s activity was led by Melco Crown Entertainment, which priced a $337 million top-up placement on Tuesday for its local casino unit. The benchmark index closed down slightly by the close, but the mood is resolutely upbeat.

UBS has dominated in Philippines equity deals so far this year, including roles on all of the deals mentioned above (and sole underwriter roles on three of those). But more bankers are moving into the country, including Malaysian rivals CIMB and Maybank, which are expanding across the region on the back of a strong home market. The latest new entrant is Religare, an Indian financial services group, which won a licence in March to set up an investment banking business in the country.

“The [Philippines] is indeed one of the world’s unfolding success stories,” said Sutha Kandiah, head of investment banking at Religare, at the time of the announcement. “With strong economic growth between 6% and 7%, a stable political situation and strong investment flows, the Philippines represent an attractive proposition to global investors.”

It is certainly true that capital inflows are a big part of the story, courtesy of monetary easing by the Federal Reserve and Bank of Japan, among others, and that has prompted some to worry about an emerging asset bubble.

“A stock market bubble would affect relatively few, but the Philippines’ real estate market is a concern, since housing investment is more widespread,” says Levine. “The scant available data on the Philippines’ real estate, alongside anecdotal evidence, suggest that prices and construction may be rising ahead of fundamentals. This bears watching.”

However, foreign capital, which makes up about 40% of trading on the stock exchange, is also being attracted by the country’s real economic progress. Moody’s notes that Benigno Aquino’s administration has succeeded in controlling fiscal deficits, stabilising the external account and running the current account into surplus. The Philippines has also been busy replacing foreign debt with peso-denominated borrowing. It is no longer a basket case.

“Technocratic and disciplined governance, with transparent targets and ambitious but achievable long-term goals, coupled with President Aquino’s popularity has set the economy on the right course,” says Levine. “Some low-hanging policy fruit has already been picked, but if development and reform continue near their current pace, the Philippines’ potential rate of growth will rise towards 8% by 2016.”

Fitch has already upgraded the country to investment grade, though Moody’s is yet to do so, despite its bullishness. That may change later this year.