Hong Kong-based insurer AIA's Philippine unit has increased its cash holdings this year and may start buying alternative assets other than real estate, said its investment head, flagging concerns about Covid-19’s impact on the domestic economy and stock market.

Local equities were down 17% for the year to October 23, and Arleen Guevara, chief investment offier at AIA Philam Life sees a “meaningful market recovery” as unlikely much before 2022. “For Philippine equities, the reward for risk has diminished considerably, given too much uncertainty emanating from both the local and global environment,” she told AsianInvestor by email.

And local bonds – like those elsewhere – are offering low returns. The yield on 10-year domestic government bonds was 3% as of October 23, compared to 4.5% a year ago, according to credit rating agency Standard & Poor's. Philippine investment grade corporate bond yields are around 3.55%, well down from this year's peak of 5.19% on March 23, based on S&P data.

Arleen Guevara

Illiquid assets therefore look increasingly attractive as a way to boost income. Philam Life's Php291.38 billion ($6 billion) portfolio has holdings in property, but not private equity, private credit or infrastructure. Its biggest allocation is to fixed income, but it also invests in equities.

The firm is open to investing in alternatives that address the requirements of long-term investors, Guevara said.

But while private assets may boost returns, she added, one should also consider their impact on capital adequacy, the structure of liabilities and duration, and the cash-flow management of the overall investment portfolio. 

Guevara said the insurer increased its cash allocation at the onset of the pandemic in March in light of the greater uncertainty around both the financial markets and how its customers would respond. It did so “to bolster liquidity and adequately to provide for any unforeseen requirements”, she added, but declined to say by how much or whether it did so in February or March.

WEAK LOCAL MARKET

The firm’s caution is understandable. The Philippines posted a record 16.5% contraction in second-quarter GDP, and scepticism about the country’s ability to return to pre-Covid levels of economic growth has led to a big outflow of foreign capital. 

Foreign selling of Philippine equities has already surpassed $2 billion year-to-date, Guevara estimated. And the market may continue to experience foreign outflows until the year-end – particularly until the US election on November 3 ­– and until such time that the country shows improvements in its Covid-19 management and signs of economic recovery, she said.

President Rodrigo Duterte has been criticised for his pandemic response, with the country having recorded 366,000 cases and 6,915 deaths from the virus as of October 23.

“Investors have become risk-averse, they do not want to pay too much of a premium for Philippine stocks, and they immediately sell-off on negative news or even with signs of a slight recovery,” she said.

And while the development of an effective vaccine would be “a game-changer” that would drive up global markets, Guevara questioned how quickly the Philippines, as a developing country, would gain access to the vaccine. 

FIXED INCOME FEARS

As for the fixed income market, she sees it as unlikely that bond yields will fall much further. Meanwhile, she said investors had been demanding higher yields for longer-tenor government bonds during recent primary auctions, indicating caution about adding duration risk.

The Philippine government rejected bids at an auction of 2033-maturity bonds on August 25 and for a 10-year offering on September 22 after investors sought higher yields than the nation was prepared to pay. Bid yields for the 2033 tenor were “way too high” compared with valuations, Philippine treasurer Rosalia de Leon was quoted as saying by Bloomberg on September 25. The government auction notices did not say what the bid yields were.

Like most other governments around the globe, the central bank of the Philippines has embarked on a massive bond purchase programme to stimulate the economy.The bond purchase programme has been essential in mitigating liquidity risk, said Guevara, who was formerly deputy director of the central bank's treasury department.

And she expects low interest rates to persist in the medium term. “One factor that merits close watching is the planned increase in government borrowing in 2021, pointing to potential supply risk,” she said.

This story has been updated to reflect that Philam Life started accumulating more cash in March this year.