Philippine Business Magazine: Volume 8 No.1 - Capital Markets
Forever Blue
In a growth or slowdown scenario, stay with blue chip stocks
By Tina Arceo-Dumlao

Just like what as many people have expected, share prices rose dramatically in the first week following the historic People Power II revolution that removed embattled President Joseph Estrada from power.

The 30-share Philippine composite index (Phisix), the main barometer of stock market behavior, rose 244.25 points. This was a 17.57% week-on-week increase reaching 1,708.18 points in that first week alone as many fund managers and some foreign investors were caught up in the euphoria and bought blue chip stocks.
But euphoria immediately gave way to reality as the Phisix lost steam and is now trading at about the same level before People Power II. Analysts say that the Phisix lost steam after the initial high as foreign investors failed to come in droves as earlier expected and that caution still reigns in the market.

Economic Problems Remain
The problem rests in the fact that the political scenario may have changed but the economic problems that kept investors by the wayside are still firmly in place. The Global Strategy Research of fund manager Goldman Sachs showed in its February 8 report that foreign investors are likely to remain in the sidelines as far as the Philippine market is concerned as there remains significant risks to the market despite the change in government.

Goldman Sachs recommends that investors "underweight" Philippine stocks, which means - don't buy too many Philippine shares. Positives to the market include continued banking sector consolidation and some mergers and acquisitions but negatives still outweigh the positives, thus, underweight rating.
"Changing politics does not mitigate fiscal risks or external vulnerability," the report states. The Philippines was given an underweight rating along with other countries still recovering from the Asian currency crisis. These include Thailand, Indonesia, Malaysia, India, and even Korea.

In contrast, Goldman Sachs recommends that buyers accumulate shares in Hong Kong, Taiwan, and China, which are exhibiting rapid reform and overseas expansion that should lead to robust economic growth.

More Than Political
Salomon Smith Barney, a member of the Citigroup, Inc. and an affiliate of Citibank N.A., says it will take more than a fresh political start to trigger a significant improvement in the country's economic prospects. The group believes it will rest on the administration of Gloria Macapagal-Arroyo to do just that.

"We maintain our view that a recovery in foreign direct investment is the essential trigger for growth. Whether the new administration can increase investor confidence and attract foreign direct investment - thereby creating jobs, increasing consumer confidence, and improving dollar liquidity - depends on how quickly her government can jumpstart reforms," Salomon Smith Barney states.

The group also believes that the return of foreign direct investment hinges on whether President Arroyo can govern effectively considering that she has a limited base of political support and that she lacks the mass appeal that propelled Estrada to the presidency. "However, President Arroyo does have several advantages: the problems are not insurmountable, she has adequate technical and political background, and the talent from the Aquino-Ramos administrations. Their collective experience should serve her government well," the report enumerates.

Specific Stocks
With cautious optimism reigning in the business community, ING Barings recommends in its latest country strategy report that investors should accumulate stocks in the telecommunications and consumer/retail sectors as spending power is likely to recover. "We continue to recommend an overweight position in telecom and consumer/retail because of better prospects. We expect mobile phone growth to be maintained, with earnings of the major telecom company, PLDT, to continue recovering," the February report stipulates.

The consumer/retail sector will benefit from election spending and from improved consumer confidence as a result of reduced political risk. Companies with strong brand names will gain more than other consumer/retail companies," ING Barings adds. Among its top picks are PLDT, SM Prime Holdings, La Tondena Distillers, Jollibee Foods, and the Bank of the Philippine Islands. These are some of the companies that should benefit from the improvement in the economy this year.
Salomon Smith Barney, on the other hand, recommends that investors choose companies that are large and liquid. These companies should be the first to recover with a burst in economic activity this year. "We prefer stocks that will benefit from an improvement in the economic and market landscape, particularly those that are country proxies and fairly liquid. By and large, these stocks were the first to benefit from the market re-rating following the ouster of former President Estrada. We believe these stocks can also weather near-term economic and political shocks," Salomon Smith Barney further states.

The top stock picks are SM Prime Holdings Inc., the holding company of the Sy Group's Shoemart chain, ABS-CBN Broadcasting Corp., PLDT, and fastfood giant Jollibee. "We also suggest focusing on stocks that trade at significant discounts to their estimated fair or historical values. We believe these stocks would deliver share price performance in the interim particularly following liquidity bursts," the report recommends.

"Events which could trigger these include US Fed cuts, peaceful elections in May, as well as a victory by the ruling party. Our recommended names include the Manila Electric Co., Ayala Land, Filinvest Land, Ionics Circuits, and Metro Pacific Corp., it adds.

Worrisome Stocks
On the other hand, Salomon Smith Barney says it was wary of stocks that were associated with the Estrada administration, particularly food and beverage giant San Miguel Corp. and the Philippine National Bank.

Bongolan of PCCI Securities Brokers Corp. feels the market would likely remain dull this year, with volumes remaining thin. This would mean very selective buying of stocks that have sound economic fundamentals.

PCCI Securities also recommends accumulation of La Tondena, Ionics, PLDT, ABS-CBN, SM Prime, and Metro Pacific. "Since the economic outlook is not one of fast growth, we stick to the most consistent companies in terms of profitability, efficiency, debt coverage, and solvency," Bongolan concludes.