Country still ‘compelling’

SENTIMENT-LED volatility is expected to continue affecting markets, banks said, but investors will still see value in the Philippines given the country’s strong fundamentals.

“[I]t is not surprising that volatility has shaken off most investors with a weak stomach for risk, resulting to the considerable amount of outflows,” the Bank of the Philippine Islands (BPI) said in a report released during the weekend.

Sell-offs sparked by the US Federal Reserve’s announcement of an impending end to a stimulus program were “purely sentiment driven,” the Ayala-led bank said, and are part of strategies to book continued gains.

As advanced economies continued to struggle, foreign investors had turned to emerging markets like the Philippines in search of better returns. Sentiment and fund flows, however, have shifted amid reports that the US is gaining traction.

Last week, Fed Chairman Ben Bernanke said the US economy was recovering enough to warrant the start of a stimulus unwinding within the year, with a possible end by mid-2014. The Fed has been buying $85 billion worth of bonds and mortgage-backed securities each month and has kept interest rates at near-zero levels since December 2008 to spur consumption and investment.

The Philippine Stock Exchange index (PSEi) subsequently lost 186.53 points or 2.86% to end at 6,326.67 on Thursday. The plunge continued on Friday, with the PSEi shedding 144.50 points or 2.28% to close at 6,182.17. A little over a month earlier it had hit a record-high 7,392.2.

The peso, meanwhile, dropped 57 centavos to finish at P43.80:$1 — a near one-and-a-half-year low — on Thursday. The currency, which earlier this year was trading in P40-41:$1 territory, on Friday gained eight centavos to settle at P43.72.

Investment bank Barclays, in a separate report last week, said: “We acknowledge that the transition to higher US rates could be a volatile process but it is creating pockets of value.”

It noted that while there would be a “bumpy transition” for emerging markets, capital is still likely to flow to the Philippines with investors focused on fundamentals.

“Solid and diverse economic growth, reform-orientated government, a large current account surplus, and its investment grade rating provide a positive backdrop for attracting flows,” the bank claimed.

BPI held a similar view: “While we do not expect this volatility to stabilize soon, we believe that liquidity will return to markets which are able to differentiate itself from the rest.”

“With its healthy fundamentals, the Philippines should remain a compelling investment story”.

First-quarter economic growth of 7.8% beat market expectations and the government’s 6-7% full-year goal. Inflation, meanwhile, settled at 3% as of May, at the low end of the central bank’s 3-5% target range.

Fitch Ratings and Standard & Poor’s have also recently raised the country to investment grade, with Moody’s expected to follow suit.

Given recent developments, BPI revised its peso and stock exchange forecasts. It now expects the peso-dollar rate to hit P41.50-42:$1 by yearend from P40-40.50 previously, while the PSEi could hit 7,500-7,700 in the next “six to 12 months” instead of from “the end of the year.” — ARRG, BFVR, BUsinessworld
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