PH equity prices seen to rise by 20% this year

JP Morgan expert takes contrary view to market consensus

Philippine equity prices can rise by about 20 percent this year in line with much brighter prospects for emerging markets across the globe, an investment expert from JP Morgan Securities said.

Hong Kong-based Adrian Mowat, managing director and chief Asian and emerging markets (EM) equity strategist at JP Morgan, said in an interview with the Inquirer last week that 2014 would likely be a “terrific” year for EMs, contrary to the consensus view that developed markets would continue to outperform.

Investors typically look at the EM segment in search of better growth but since 2010, forward-looking earnings per share of emerging markets lagged those of developed markets, Mowat said. This was reflected by EM equity markets, which underperformed peers from developed markets by 40 percent since 2010.

However, this would likely change this year as the so-called “tail risks” were diminishing, Mowat said. EM equities overall might advance by around 23 percent this year, he said.

Within the EM collective, JP Morgan is “overweight” on India, Taiwan, Korea, Thailand, Mexico, Russia and Peru due to attractive valuations in these markets. On the other hand, JP Morgan is now “neutral” on the Philippines, which was among its favored markets for last four years.

“Overweight” is a recommendation to buy in excess of a benchmark index as opposed to “underweight”, which is a call to reduce position.

“We have a style bias to move into value and one thing that’s clear is that Philippine equities are not cheap,” Mowat said.

JP Morgan has an underweight rating on China, which it thinks will lag the EM story this year. It is also underweight on Turkey, Brazil, Colombia and Poland.
Alongside a much better global economy this year, Mowat said many EMs made the right move of allowing their currencies to weaken in 2013, allowing trade positions to improve with a more competitive exchange rate. As such, he noted that countries which had problematic current-account deficits like India and Indonesia were seeing a turnaround.

In the case of the Philippines, the peso has depreciated to 44.414 at the end of 2013 from 41.192 against the dollar in end-2012.

Overall, JP Morgan sees economic outlook for EMs gradually improving.

For the Philippines, seasonally adjusted quarter-on-quarter gross domestic product (GDP) growth for the fourth quarter of 2013 is seen by JP Morgan to slow to 2 percent from 4.3 percent in the third quarter in the aftermath of a catastrophic typhoon. But for the first three months of 2014, this quarter-on-quarter growth is seen to accelerate to 9.5 percent amid projected rebuilding efforts.

For the second, third and fourth quarters of 2014, seasonally adjusted Philippine GDP growth rates are seen by JP Morgan at 8.2 percent, 6.1 percent and 7 percent.

Another nonconsensus view by JP Morgan for 2014 is that the tapering of US Federal Reserve’s quantitative easing (QE) or liquidity-inducing bond-buying activities will actually be bullish.
“The simplistic view of QE is that it drives down bond yields. The complete opposite happens,” Mowat said.

“The big mistake is that people just focus on central bank’s buying and assume no impact on other investors in bonds.

But what happens with the bond investor is when the central bank announces a very aggressive pro-growth policy, if I own bonds, I’m going to sell some of those bonds and buy growth assets,” he said.

Even when the US Federal Reserve removes its pro-growth policy, he said there would still be strong US growth.

JP Morgan assumes that the US Fed will completely remove its monthly bond buying operations by the third quarter of this year.

“The sooner we’re done with tapering, the earlier we get a confirmation from the US central bank that they are confident about growth,” he said.

According to Mowat, there was a big misconception that emerging markets suffer when US interest rates rise. He noted that the US Fed’s targeted fund rate was at 1 percent in 2003 and had risen to 5.25 percent by 2006. Yet during the 2003-2006 period, he noted that EM equities were “massively outperforming.”
“We’re all about growth. We’re not about cheap money,” he said. –Doris C. Dumlao, Philippine Daily Inquirer

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