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The Philippine economic recovery has made several false starts before. Do you think this current recovery is sustainable?
Garcia: We view that economic growth over the medium- to long-term is now more sustainable compared to the Philippine economyÆs boom-and-bust track record over the past 20 years. Recovery has more traction and is more sustainable now because of the significant structural changes in the economy. The changes include the ongoing fiscal consolidation and the liberalization and deregulation of sectors like trade, foreign exchange, banking, retail, oil, telecommunications and energy. These economic, monetary and fiscal reforms have placed the economy on a stronger footing.
The Philippines recorded a net outflow of $246.4 million in foreign portfolio investments in August due mainly to the fallout from the US subprime mortgage crisis. Do you expect the Philippine stock market to continue to suffer from the lingering concerns over US credit woes?
At the height of the US subprime mortgage crisis, the Philippine stock market was one of the markets that declined the most owing to liquidity and capacity issues. Portfolio investments or hot money that exited the market during the height of the sell-off were predominantly from hedge funds that were experiencing margin calls and huge redemptions.
Actually, most domestic long-only investors like ING Investment Management Philippines experienced inflows in their equity funds during the month of August, which shows that investors view this financial market turmoil as a buying opportunity. Going forward, we donÆt expect the same kind of volatility and extreme price action to hound the Philippine stock market. We believe the worst is behind us and at some point the Philippine stock market together with the rest of Asia will decouple from US financial markets.
Former Philippine Joseph Estrada was recently sentenced to life imprisonment after an anti-graft court found him guilty of plunder. Do politics continue to weigh heavily on investor sentiment in the Philippines?
The conviction of former President Joseph Estrada was a historic milestone for the Philippines. However, politics does not anymore weigh as much on investor sentiment as it did a few years ago. Foreign investors take political risk as part of the investment risk in investing in emerging markets. At the end of the day, they invest based on the fundamentals and the credit-worthiness of the sovereign or corporate issuer. For local investors, there is a sense of political fatigue among the civilian population who are more focused on improving their economic lot than trying to oust an unpopular leader. The local populace keeps a wary eye on politics but does not actively engage or support it.
What is your year-end target for the Composite Index of the Philippine Stock Exchange?
We are still constructive on the Philippine stock market over the medium- to long-term. The PhilippinesÆ economic fundamentals remain strong. Ultimately, stronger economic growth will boost corporate top-line growth. Benign inflation and low interest rates will help Philippine corporates manage costs and expand net profit margins. We estimate corporate earnings to grow by at least 20% this year and next year, above market consensus of 12-15%. We maintain our year-end target for the PSE index at 3,600-3,800. On a 12-month view, our PSE index target remains at 4,500.
What are the sectors you favor the most in the Philippines?
There are quite a number of favored and explosive sectors. Mining is in the investorsÆ radar as the Philippines Æ large mineral reserves, reputedly one of the worldÆs largest, are still mostly under-mined and undeveloped. With global prices of metals quite firm on global demand coming from both China and India, the Philippine mining sector will attract more foreign direct investments to extract the countryÆs estimated $1 trillion mining reserves.
Another sector that weÆre bullish on is the real estate sector as the country is in the midst of a recovery in the property cycle. Growing interest from local residents, overseas workers and the growing call center industry is propelling demand of real estate. A third is energy, which gets a boost from privatization of national assets, rising interest among local and foreign investors, and growing demand. Lastly, the tourism industry is shining because of the property and infrastructure being developed to cater to growing number of tourists.
Philippine Long Distance Telephone Company, Jollibee Foods and Philex Mining were the top three holdings in the ING Philippine Equity Fund as of end-August. Why do you like each of those stocks?
In the midst of the equity sell-off in August, the fund invested in these three companies as defensive plays. PLDT has stable growth and reliably pays out dividends which are bound to increase over the near-term as its cash hoard grows and its capital investments slow down. Jollibee is a consumer staple and the company is focused on growing its brands organically both here and abroad. Philex is the most profitable mining company and is professionally run. Philex is the countryÆs largest producer of gold and copper, both of which are in strong demand abroad. All three companies are cash-rich and have low gearing. We believe that these stocks will likely outperform the PSE index over the next 12-18 months.
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