The world's worst stock market is not cheap enough to buy

For some Philippine money managers, it’s still too soon to scoop up shares in the world’s worst-performing stock market.

As the Philippine Stock Exchange Index dipped below 7,100 during the session on Tuesday, taking its valuation to its lowest level since January 2016, Metropolitan Bank & Trust is among the firms that’s staying on the sidelines.

John Padilla, the head of equities at the money manager, says he’s too concerned about the high inflation level, rising oil prices, weakening peso, increasing interest rates and drying up liquidity.

“Everybody is bracing and positioning for a higher inflation, and with oil continuing its climb there isn’t anything to say that’s enticing to go bargain hunting at this point,” says Mr Padilla, who helps manage 450 billion pesos (Dh30.47bn). “It used to be that a buy-on-weakness strategy works, but now for prudence it’s better to step aside and let the market take its course.”

The Philippine Stock Exchange has plunged 17 per cent since the end of December, becoming the world’s biggest losing equity market and taking its valuation to 15 times estimated earnings for the next year, below its five-year average. The gauge fell as much as 0.5 per cent to 7,095.26 on Wednesday.

The recent sell-off from emerging markets and US-China trade frictions only added to worries over the nation’s headwinds. Overseas investors have withdrawn almost $1.6bn in 2018, exceeding inflows from the past four years.

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Mr Padilla says it’s not improbable for the Philippine stock gauge to fall below 7,000 in the near term and that it could go as low as 6,600. He said his firm will change its underweight call on the equities should consumer prices, the peso, interest rates and liquidity show improvements. September inflation data is due on Friday.

“You can get a better return with your cash in time deposit now rather than exposing it to equities, where at best you get a flat return but run the risk of losing part of your money if you buy the wrong name,” Mr Padilla says.

The country’s shares will face more challenges before things get better, according to Michael Enriquez, the chief investment officer of Sun Life of Canada Philippines. The PSEi could stay at around 7,100 this year, with earnings growth of 5.5 per cent compared with 10 per cent to 12 per cent consensus, he says. To put that into perspective, the key stock gauge closed at almost 8,559 at the end of last year.

Steven Ko, who helps manage 60bn pesos at Rizal Commercial Banking, sees further risk as limited. While the benchmark index may drop to 6,900, he says there’s also a chance it could climb to 8,000 this year as sentiment improves. He expects inflation to peak and says the peso may have already seen its sharpest depreciation this year.

“We are still holding on to our cash, but we are selectively buying some of the oversold names that are already worth looking into,” Mr Ko says. He favours property stocks because he sees higher earnings-growth prospects and likes banks as he deems them unduly hit by the rout.

Property stocks are still in vogue despite the most aggressive interest-rate tightening in the Philippines in 18 years.

Traders at Security Bank and ATR Asset Management said earlier this month that they are sticking with their overweight position for the sector, even as the central bank has jacked up policy rates by 150 basis points over four months. SM Prime Holdings Iand Ayala Land are among preferred builders on bets the tightening will not lead to a jump in mortgage rates and discourage home buyers.

“Favouring property stocks at a time of rising interest rates seems a paradox,” said Noel Reyes, who helps manage $1bn as chief investment officer at Security Bank. “But this is an extraordinary situation since foreign inflows are helping drive residential sales and office leasing. The weaker peso has given foreigners and overseas Filipinos the firepower to buy property.”

Chinese buyers, foreigners and families of overseas Filipinos have been a driving force for the market: SM Prime, the biggest home builder by market value and largest mall owner, sourced 80 per cent of its first-half reservation sales from the two latter groups. And most of the offshore online gaming licenses issued by the Philippines since President Rodrigo Duterte assumed office two years ago went to investors catering to gamblers from the mainland.

As a result, home-reservation sales jumped 23 per cent to 215 billion pesos in the first half of the year for the nation’s six biggest developers, AP Securities data show. Developers listed on the Philippine exchange delivered 16 per cent growth in second-quarter earnings, one of the best sectors, according to data compiled by Bloomberg based on median income growth results from the companies.

While that’s not prevented the sector’s shares from falling, it’s certainly helped.

* Bloomberg