Asia's Worst Equities Market Shows Signs of a Comeback

(Bloomberg) -- Philippine stocks are heading for the sharpest monthly gain in more than two years as foreign funds start trickling back into a market that was among the world’s worst performers in the first half of the year.

The benchmark Philippine Stock Exchange Index has gained 6.6 percent in local currency terms so far this month, among the world’s five best performers. The gauge, which tumbled 16 percent in the first half and sank into a bear market in June, has rallied more than 3.9 percent in three days as overseas investors turned net buyers this week following a record 25 straight weeks of withdrawals.

“Foreign funds have started coming back as investors have realized there’s value in the market,” said Alfred Dy, research head at CLSA Philippines Inc., the nation’s largest foreign broker. “There’s still room for more gains because in spite of the bounce there is still value on the table.”

Asia's Worst Equities Market Shows Signs of a Comeback

Philippine stocks are trading at 16.47 times 12-month estimated earnings and while that has gone up from 15.1 times in June, the multiple is still more than one standard deviation below the 17.75 times five-year average.

Still, Morgan Stanley strategist Sean Gardiner advises investors to stay underweight on Philippine equities as the market is fairly valued relative to its 10 to 25 year average. “A more substantial re-rating in P/E valuation is difficult given global tightening, rising earnings risk and reduced domestic liquidity," according to a June 26 note he wrote with analyst Aarti Shah.

Overseas investors bought $19.45 million of Philippine shares this week, as they also picked up shares in other Asian markets such as Thailand and Indonesia. They bought $12.06 million on Thursday, the most since Jan. 17.

The trend is welcome news for the Philippines after it saw international funds unload $1.3 billion of stocks this year, exceeding the record $1.19 billion withdrawn for all of 2015. They had sold shares amid fears of a weakening peso, rising inflation, a trade war between the U.S. and China, and a general selloff in emerging markets.

Dy, rated the top Philippine equities strategist by Asiamoney from 2010 to 2017, said the central bank’s stance on inflation next month will be a key factor that could boost stocks. Progress on the government’s tax reform and its plan to remove caps for rice imports will be additional catalysts, he said.

Among the big caps, Dy recommends Ayala Corp., Ayala Land and Bank of the Philippine Islands. Investors should also buy so-called second-liners such as Bloomberry Resorts Corp., Puregold Price Club Inc. and Robinsons Retail Holdings Inc., he said.

Potential risks for the market include U.S-China trade tensions and the possibility second-quarter corporate earnings will miss expectations of 8 percent to 9 percent growth this year, according to Dy.

“We could already be on the road to recovery provided there won’t be any missteps from here,” Dy said. “Investors should continue to buy selective blue chips that will lead the rebound.”

©2018 Bloomberg L.P.