Traders work on the floor of the Philippine Stock Exchange in the Makati district of Manila, the Philippines. (Photographer: Taylor Weidman/Bloomberg)

World's Most Unloved Stocks Pummeled Further by Rate-Hike Fears

(Bloomberg) -- The problems keep piling up for Philippine stocks, the world’s worst performers this year.

The Philippine Stock Exchange Index fell as much as 3.3 percent on Thursday before partially recovering to close down 1.4 percent.

The gauge has lost more than 10 percent this year as mounting inflation pressure and concern the economy is overheating spur speculation the central bank will need to tighten more aggressively than previously thought. The peso, Asia’s worst-performing currency this year, is also worrying investors.

“Investors are having a hard time justifying the Philippine market’s valuation,” said Lexter Azurin, a senior analyst at AB Capital Securities Inc. in Manila. “A lot of analysts are saying the Philippine central bank is already behind the curve.”

World's Most Unloved Stocks Pummeled Further by Rate-Hike Fears

“The peso’s weakness is also helping drag Philippine stocks down because foreign investors need to remit their earnings back and they’re booking losses in dollar terms,” said Azurin, who sees the index support at 7,400. The gauge closed at 7,682.24.

Read more on what risks Philippines is facing

Foreign investors have been net sellers of Philippine stocks for 11 straight weeks through April 11, the longest current run of outflows in the Asia-Pacific region, Jefferies said in an April 12 report. Overseas investors have pulled a net $805 million from the nation’s stocks over the period. it said.

Alliance Global Group Inc. and Megaworld Corp. led declines on Thursday, both dropping 4.9 percent.

This year’s slump has caught Philippine bulls off guard. Many of them entered 2018 with a positive outlook following the implementation of a tax reform program that cut personal income taxes, while raising levies on other items to fund President Rodrigo Duterte’s infrastructure program.

But rising costs of oil and rice, a staple food, have added to price pressures and hurt the crude-importing country. The Philippines has the fastest pace of inflation among 17 Asia-Pacific nations tracked by Bloomberg after Kazakhstan. The majority of economists surveyed in February to April predict the central bank will raise the benchmark rate this quarter from a record-low 3 percent.

“It was expensive, it was over-owned,” said Joshua Crabb, head of Asian equities at Old Mutual Global Investors AP Ltd. “Inflation was coming into the system. At the same time, cyclicality was improving on global growth, so other countries were becoming more attractive.”

Attractive Valuations

There are still some bulls left. Credit Suisse Group AG recommends investors consider buying Philippine stocks, given that valuations are already below its five-year average and are approaching the 10-year average, analysts Dan Fineman and Justin Cimafranca wrote in an April 18 report.

Even so, the peso has been under pressure amid concerns over the nation’s widening current-account deficit. The currency has weakened more than 4 percent this year against the dollar to 52.10 on Thursday.

Nomura Holdings Inc. raised its forecast for the current-account deficit and said it does not expect the shortfall to narrow in the coming months, after data last week showed exports in February fell for the first time since 2016.

“Fundamentals are pointing to a weaker peso -- worsening current-account, trade deficits and accelerating inflation,” said Teppei Ino, an analyst at MUFG Bank Ltd. in Singapore. “We are seeing a weaker bias for the peso and see a possibility the currency may fall near 53 or even beyond 53 per dollar before the end of this quarter.”

©2018 Bloomberg L.P.