YEARENDER: Stock market in dream run in 2010, rampaging to new record highs

MANILA, Philippines – The local stock market had a dream run last year, rampaging to new record highs with many investors convinced that the global economy is on the mend and that emerging markets in Asia hold much promise.

The PSE index (PSEi), one of the best performing in the world, surged 37.6 percent in 2010 to close at 4,201.14, the fourth biggest annual advance over the last 10 years – trailing 2009’s 63 percent, 2006’s 42.3 percent and 2003’s 41.6 percent.

The market’s upbeat performance was driven largely by strong economic indicators, a prolonged low interest rate regime and robust foreign fund flows that led many analysts to believe that the market was entering a new bull market phase.

Last year, the country started to attract some of the foreign funds seeking higher returns out of emerging Asia, which is seen in a much better economic fundamental position compared to the Western world.

Various Southeast Asian stock indexes similarly reached new all-time highs as foreign fund managers made their sharpest switch back to risk and took overweight positions in emerging markets.

While the last two months saw net foreigners with net sales of P3.65 billion, the overall picture remained positive. Net foreign buying in the PSE more than doubled last year to P35.6 billion from P14.9 billion in 2009.

A total of 423.9 billion shares changed hands throughout 2010, valued at P1.21 trillion which is 29.8 percent higher than the year earlier level of P930.4 billion. Netting out block sales, however, which accounted for 5.72 percent and 18.19 percent of volume and value, respectively, the number would shrink to 399.6 billion shares worth P971.3 billion.

The combined market capitalization of listed issues as of Dec. 31, the last trading day of 2010, reached P8.87 trillion, up 47.1 percent from P6.03 trillion.

PSE chairman Hans Sicat said: “From a sluggish 2009, gross domestic product grew by 7.5 percent in the first three quarters of 2010, on account of the robust performances of the industry and services sectors. Inflation and interest rates continue to be benign. These factors have largely buoyed stock market sentiment and reinforced investor and business confidence.”

“Many of the developed, Western economies were showing signs of economic recovery despite the threat of some European nations’ bankruptcies. Overall, the major global stock markets were on an uptick this year, improving capital market conditions,” Sicat further said.

2010 also saw many companies tapping the equities market to raise funds amid buoyant markets. Total capital raised amounted to P84.9 billion, an increase of more than two-fold from the P38.8 billion generated in 2009.

This was largely fueled by the initial public offerings (IPOs) of Gokongwei-owned budget carrier Cebu Air – the largest maiden offering ever by a Philippine company in US dollar terms – as well as Nickel Asia and IP Converge Data Center Inc.

Cebu Air’s IPO raised P23.3 billion (approximately $539 million). Including the over-allotment option, the Gokongwei Group raised a total of P26.5 billion from the share sale.

The stock rights offerings of First Gen Corp., SM Development Corp. and Bank of the Philippine Islands likewise boosted market liquidity and volume.

In terms of sectoral indices, the holding firms index emerged as the best performer in 2010 as it jumped 110.28 percent. This was followed by the industrial index which climbed 56 percent.

“The market ended the year on a positive note, consistent with our expectations…The surge in the final two weeks of the year were no more than the traditional window-dressing trades as companies closed their books with higher investment valuations,” said Jun Calacay of Accord Capital Equities Inc.

For this year, analysts believe that focus on the stronger Asian economies and the emerging markets will continue through as growth in developed markets remains lackluster.

The International Monetary Fund (IMF) said it expects a two-speed global recovery to extend into 2011 with developing economies growing slowly while emerging markets power ahead.

“As we enter a new chapter in 2011, we remain bullish that the initiatives and reforms we have started will enhance the growth of the capital markets,” Sicat said

In July last year, the PSE rolled out a new trading system (NTS) designed to trade a wide range of cash, debt and derivative instruments as well as improve the capacity of the PSE to handle any future sharp increases in its value turnover.The new trading system was developed by the New York Stock Exchange (NYSE) Technologies.

The NTS, which replaced the Legacy MakTrade system used since 1993, had a rough start, encountering technical disruptions.

Despite hitting record highs last year, the local market is expected to maintain its bullish mode with many market experts saying any correction would not last long.

Calaycay said Europe will continue to provide volatility to global markets while how Chinese policymakers deal with inflationary pressures may temper optimism.

“Expectations of a stronger US economy this year will keep the bulls in the arena, however. Here at home, the

focus will be on the government’s revenue generation, the containment of the budget deficit and levels of interest rates,” Calaycay said.

“Financials and consumer staples (retail) will provide stability to equity portfolios while mining and oil will present some opportunities for a quick buck along the way,” Calaycay added.

He forecasts the market hitting a conservative range of 4,630 to 4,660 and an optimistic band of 4,890 to 5,000, based on the three, five and 10-year simple and compounded average growth pace.

“Among the initial impetus to the market next year will be the discounting of Q4 2010 and full year results,” Calaycay added.

Government economists are confident the full year growth target of five to six percent will be achieved, or could even be surpassed. “ This eases pressure on the Bangko Sentral to hike domestic rates when it first meets on February 10, 2011. More so, with inflation not seen to shoot up prematurely, nor drastically. This will be a boon for companies contemplating on expanding their businesses and production capacities with capital investments in anticipation of demand growth,” Calaycay said.

Leading online brokerage CitsecOnline likewise maintains its bullish outlook on the market on ample liquidity, strong upside risk for corporate earnings, and the PSEi’s attractive valuation relative to its Southeast Asian peers.

CitisecOnline is most bullish on the consumer, property and banking sectors. Its stock picks are Metrobank, Security Bank, Meralco, Metro Pacific Investments, DMCI Holdings, Megaworld, Robinsons Land, Ayala Land, EEI, Energy Development Corp., First Gen and First Phlippine Holdings.

“Consumer spending and investments have ample room to grow. Banks are also well positioned to fund growth in consumer spending and investments given their very healthy balance sheets, with the NPL (non-performing loan) ratio of 3.3 percent as of end June 2010, more than adequate NPL cover of 93 percent, and high level of capital adequacy ratio at 16 percent as of end 2009. Banks are also very liquid with loans to deposit ratio at 65 percent as of 2009,” said April Lee Tan, head of research at CitisecOnline.

Tan said the new administration is expected to be the catalyst that will fuel economic growth as improvements in governance and implementation of economic reforms boost investor confidence, leading to higher investments. –Zinnia B. Dela Peña (The Philippine Star)