The Philippine stock market has gone from strength to strength in a record year of gains in 2012 and the operator of the country’s stock exchange is confident the rally will be sustained through next year, on the back of solid economic growth, a spending boost from elections in May and a long-awaited upgrade of the country’s sovereign credit ratings to investment grade.
The Philippine Stock Exchange is also looking at a solid pipeline of new products such as exchange traded funds, real estate investment trusts and Shariah-compliant products, which it hopes will further boost liquidity and deepen the range of financial instruments traded on the bourse, PSE President Hans Sicat said in an interview late Monday.
“I don’t think we’ll necessarily top it (this year’s gains) but what’s been set is a higher level of activity. We do think that interest rates and inflation will continue to stay low and basic growth of the economy will hover at the 6% level,” Sicat said. The 30-company benchmark index PSEi has closed at record highs 23 times this year, the last on Oct 7 at 5443.74 points. As of 0615 GMT yesterday, the PSEi was trading 0.4% lower, bringing this year’s gains to 23.8% and making the Philippines the third-best performing stock market in Asia this year, behind Pakistan and Thailand.
The PSEi’s strong gains has emboldened local companies to raise funds through the stock market, generating 175bn Philippine pesos ($4.2bn) in proceeds as of the end of September, already eclipsing the PHP107.5bn all-time high for the whole of 2011.
More crucially, Sicat said that the local equities market would most surely get a lift from an expected upgrade of the country’s credit rating to investment grade within the next twelve months.
Credit ratings agencies Standard & Poor’s Ratings Services and Fitch Ratings both have the Philippines at a notch below investment grade, while Moody’s Investors Service still has Manila at two notches below investment grade. Analysts have said that the Philippines could be due for an upgrade in 2013, with ratings agencies typically conducting their reviews every 12-18 months. Fitch Ratings last upgraded the Philippines in June 2011 while S&P lifted the country’s rating in July.
“We’d likely benefit from one event next year: A re-rating event. We’ve seen it in other countries like Indonesia, Brazil and many other economies,” said Sicat, pointing to stock market rallies elsewhere, which followed on the heels of a credit upgrade. An actual investment grade rating will still draw into local securities foreign funds that otherwise can’t invest in economies rated as junk, he said.
Meanwhile, the government can do more to boost the domestic securities market, including cutting taxes on transactions, expediting regulations on new products like exchange traded funds and by overcoming a political impasse to pave the way for the launch of REITs, Sicat said.
The Department of Finance and property developers have clashed on the manner in which assets are to be transferred to REITs. The DOF wants to impose a value-added tax on initial asset transfers to REITs and proposes increasing minimum public ownership to 67% within three years from an initial 40%. Developers have objected to the proposed rules, citing the provisions of the 2010 REIT law. Sicat said property developers have urged Congress to revise the law to clarify provisions on minimum ownership and taxation and that he expects a resolution to come after the May 2013 congressional and local elections.
Separately, the Securities and Exchange Commission is expected to finalize rules on ETF trading within the year, which will allow the products to be listed by early 2013, Sicat said.
The stock exchange is also consulting with other groups to draw up a list of Shariah-compliant products that could attract investments from the Middle East. These products, targeted at Islamic investors, don’t invest in industries like gambling and the manufacture of alcoholic products, which are deemed contrary to Islamic principles.
“With our goal of increasing overall liquidity in the stock market, that could be very helpful,” said Sicat, noting that globally there is around $1.2bn in investible funds for Shariah-compliant stocks. He said many Filipino Muslim investors had turned to Indonesia and Malaysia for Shariah-compliant investments. Foreign funds have been net buyers of PHP95.21bn of Philippine stocks in the first nine months of the year, six times the PHP15.61bn invested in the same period last year. They accounted for 40% of total trading volume in the first nine months and a further increase could bolster the market, said Sicat.
Daily average trading volume in the nine months to September has increased 28% to PHP7.07bn from PHP5.54bn in the year-earlier period.
Even as the PSE seeks additional liquidity, Sicat said, the bourse isn’t about to move back the end-2012 deadline for listed companies to comply with the minimum 10% public ownership requirement, even if doing so would mean the delisting of major blue chips like San Miguel Brewery Inc. The move to impose a 10% minimum public float is aimed at wider public participation in the stock market.
PSE data indicate that around two dozen firms out of 256 listed companies have public ownership below the 10% minimum level. Firms that can’t comply will be suspended from trading on the stock exchange starting January and will eventually be delisted. Dow Jones
