Thursday, 15 December 2011

Morgan Stanley says buy PSE

Business Mirror
IT is not often that the Philippine Stock Exchange (PSE) is cited as the place to put your money. So it comes as a bit of a surprise that in the most recent, December 13 Morgan Stanley Asia/GEMs (Global Emerging Markets) Strategy report, the PSE experienced a significant upgrade.
Morgan Stanley, through its MSCI affiliate, is a provider of research and strategy for the global markets to institutional investors. The MSCI creates indexes both globally and regionally in order that these big-time investors have a gauge to judge their own portfolio performance. Further, for both the global and regional markets, Morgan recommends a particular weighting. That is, for example, based on stock-market size, should you have more of your money in Taiwan or in the Philippines?

Morgan says it should be in the PSE as the Philippines was upgraded to “overweight” and Taiwan downgraded to “underweight.”

Twenty countries are included in the GEM list. The Philippines is now included with China, Russia, Brazil and South Africa in the overweight group. Mexico, India and Taiwan are at the bottom all being underweighted. Based on this new assessment of the PSE, going from equal weight to overweight means that the amount of portfolio allocation to the PSE should nearly be doubled.

The Philippines was a big mover on the list, not only going into overweight territory but moving from No. 11 to No. 5. Further, Philippine Long Distance Telephone Co. (PLDT) was made a part of the focus list, a type of global model portfolio, including Samsung, Hyundai, BHP Billiton (mining), Telefonica Brazil, and Thailand’s PTT Global Chemicals.

There are two reasons you as an investor should be excited about this Morgan Stanley report. Global-equity portfolio managers pretty well must now buy into the PSE. For them to capture the MSCI index performance, they will need to show that they are overweighted in PSE issues and this must come before the end of the year. This is true window-dressing, not the nonsense you read about in the newspapers.

Do not expect a rush of foreign money into the PSE between now and New Year’s. The political circus that is taking place has effectively killed that. However, the longer-term investment from abroad will come in during the first quarter of 2012 or when the political turmoil is finished.

The second reason this is all very important is why the PSE, in general, and PLDT, in particular, has been upgraded.

Morgan’s target price for PLDT is P3,000 per share. That should be music to your ears considering the stock is trading at P2,454 and Morgan is calling for a more than 20-percent price increase. That would put the PSE Index near my best-case scenario level of 5,000.

Morgan is also expecting an 8.6-percent dividend yield for PLDT, which makes putting your money in PLDT a 30-percent return-on-investment proposition. The expected Price Earnings Ratio (PER) for PLDT is 13.7. Given that a PER of 15 is not unreasonable, we could see an even higher price than P3,000 for the stock.

Why is Morgan so favorable on the Philippines?

The MSCI Emerging Markets Index includes 18 PSE-listed companies. The 2011 performance of these issues is a negative 2.9 percent. That may not seem great but it is in comparison to others. The Brazilian index components are down 17 percent. Malaysia and Thailand are down over 4 percent. Taiwan, India, Peru and China are all down more than 20 percent. The only country that has outperformed the Philippines is Indonesia, down 1.8 percent.

There are three important factors that Morgan looks at. These are Return on Equity (ROE), PER, and currency risk.

The Philippine peso is grouped with Malaysia, Russia and China as having the lowest risk of currency vulnerability to external forces such as current account status and borrowing needs. That is very good seeing as all three of the others “manage” (read manipulate) their foreign-exchange rate. The External Vulnerability Indicator of these four nations is 24 plus. By comparison, Thailand has a rating of 5.5 and Indonesia 3.2. In this case, high score wins.

With an overall trailing PER around 18, the PSE is slightly overvalued. However, it is the corporate Return on Equity where Philippine companies really stand out. ROE simply means, how much money is a company making based on the value of the company. The Philippines ranks No. 3 out of 20 on ROE. And believe it or not, Philippine companies, at least the 18 included in the Morgan index, pay a lot of their profits out in dividends, ranking No. 5.

For political risk, the Philippines ranks No.17 out of 20. Egypt is number 20. No comment.

Buy the PSE. Morgan Stanley says so.

E-mail to and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by Inc.

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