Why investors should look into PH, emerging market stocks

Posted at 04/06/14 9:17 PM

MANILA, Philippines – Stocks in emerging markets like the Philippines will continue to be attractive in the long term due to investment opportunities and growth potential in these regions, regional market analysts said.

Robert Rountree, global strategist at Eastspring Investments, said that although Philippine stocks are among the most expensive, the lack of massive selloffs indicate that investors are bullish on emerging markets.

“The emerging markets generally, across the board, look attractive and they’re not honey traps. We’ve seen that some markets are still expensive, but people have held those markets because they still buy the long term story. And the Philippines is a clear example of that. So are India and Indonesia,” Rountree told reporters at the launch of Pru Life UK’s Global Emerging Markets Dynamic Fund in Singapore.

“If investors are really worried about emerging markets, you might have seen a bigger selloff in the expensive emerging markets. And we haven’t seen it,” he added.

Eastspring Investments global strategist Robert Rountree

Rountree said most investors have focused on developed markets in the past two to three years because of valuation, but he noted that shares in the emerging markets are undervalued, which provides for strong upside.

“Two to three years ago, a peculiar string of circumstances focused attention on the developed markets, in particular US and Europe…Their story at that time was more compelling, but it’s not compelling anymore today because the valuations aren’t there,” he said.

He stressed that it is “absolutely imperative” for profits to rise in US and Europe if market rallies are going to be sustained this year.

If the rallies are not sustained, investors will likely switch and start looking into shares in the emerging markets.

Rountree warned, however, that there is no definite time frame for when the switch will occur.

“We don’t know when of course, and it could be very fast,” he said.

Based on the study of Eastspring, emerging markets in Asia have a low valuation and higher forecast profit growth compared to emerging markets in Europe and Latin America.

The International Monetary Fund and UBS AG, meanwhile, are also bullish on emerging markets, forecasting that emerging countries will grow 2% faster annually than developed markets in the long term.

US Fed taper, currency

There are fears that the tapering of the US Federal Reserve bond buying program will cause emerging markets to plunge.

But according to Rountree, he does not expect the reduction, which may lead to more capital outflow from emerging markets, to cause problems in the global stock market.

“I don’t see problems here because if money is being pumped in that rate, and emerging markets rise, then money is pumped in at a slower rate, why should the emerging markets fall?” he said, noting that despite encouraging data, the US recovery is still not strong and interest rates will likely remain low.

“At the end of the day, the money is still going to be in the system,” he said.

He also said that the “Fragile 5” of Indonesia, India, Brazil, Turkey and South Africa were called such because of solid fundamental reasons not necessarily linked to the bond buying reduction.

These markets are also among those with low buffers or foreign exchange currency protection.

“These currencies came under pressure for very clear fundamental reasons, and the trigger was the tapering,” he said.

The Philippine peso, on the other hand, is the most protected in terms of foreign exchange, which is why Rountree said he disagrees with the idea that interest rates in the country should increase.

“[Bangko Sentral ng Pilipinas Governor Amando Tetangco] said Philippine interest rates may have to rise to offset any pressure on the peso. I sat there and said, ‘What?’ Because the country with the highest protection in the world is the Philippines. What is this guy talking about? He don’t need to, if he does, it’s a domestic decision. The Philippines is under not any fundamental pressure,” said Rountree.

Stock picks in the Philippines

Irmak Surenkok, client portfolio manager at Eastspring, said that because valuations across global emerging markets are “cheap,” it provides investment opportunities for investors over the long term.

In the Philippines, Eastspring is investing in equity stocks of First Gen Corp., Filinvest Corp., and Metro Pacific Investments Corp. under the PruLink Global Emerging Markets (GEM) Dynamic Fund, which was launched on April 4.

Surenkok said Eastspring invested in shares of Lopez-led power generation firm First Gen because of a “mispricing” caused by natural calamities in 2013.

“We believe the stock was oversold because investors were scared to invest on the values and plunged into other stocks that gave them more comfort. We took advantage of this and recognized that the valuation was cheap and so we invested in First Gen Corp.,” she said.

She explained that Filinvest stocks, on the other hand, were attractive because it is fundamentally sound and cheap valuation.

“We like this stock because it concentrates on medium to low end housing and we believe in the demographic story in the Philippines will support the growth as well as the rising incomes,” she added.

She said Eastspring invested in Metro Pacific because “investment to GDP ratio in the Philippines is still very low and we believe there is much room for that story to grow.”

Eastspring Investments client portfolio manager Irmak Surenkok

According to Eastspring’s data, the Philippines has the largest country weight among global emerging markets, but Surenkok explained that “it’s not because we think that Philippines as a country is a cheap investment, it’s only a result of our stock picking.”

Eastspring Investments, the asset management arm of Prudential Corporation Asia, is the region's largest fund houses with an estimated $100 billion in assets under management.

GEM fund launched

Pru Life UK, the Philippines’ lone Briitish life insurer and investment-linked life insurance pioneer, launched the PruLink GEM Dynamic Fund to generate long-term capital growth though a portfolio of equities, equity-related securities and bonds.

The GEM fund is structured as a US-dollar denominated feeder fund that invests in securities of companies which are incorporated, or listed in, or operating principally from, or carrying on significant business in, or derive substantial revenue from, or whose subsidiaries, related or associated corporations derive substantial revenue from the emerging markets worldwide.

“Emerging markets present a viable investment option, with their favorable demographics, increasing urbanization and economic modernization. Stock-picking opportunities are broadened with the expanding universe of companies in emerging markets,” said Pru Life UK president and chief executive Antonio Manuel de Rosas.

The three stocks invested in by fund manager Eastspring in the Philippines take up about 4% of the GEM fund. The biggest allocation is in China with 20%, followed by Korea with 17%.

A bulk of the fund is allocated in the financials sector with 28%, followed by energy with 16%.

The GEM fund is initially offered to those who will be availing or those with existing dollar-denominated single-pay policies such as the PruMillionaire and PruLink Investor Account (PIA) Plus.

Single premium of PruMillionaire starts at P1 million while single premium of PIA Plus starts at P100,000.