Philippine Stocks at high discounts
With great interest do we look at the performance of the stock markets at our dinner table as I asked my sons almost two years ago to invest 100 peso in any market of their liking. On a quarterly basis we evaluate and look at the different drivers of performance. My youngest invested in the PSEi, which performed badly compared to the markets in the region and so did the Philippine peso. In the table above you can see that it would have been wiser to invest his hard earned 100 peso in any other market around us. The return over the 21 months has just been 2 peso, while if he had invested it in the Thai market and converted it back on April 1 into Peso, he would have been rewarded with 57 peso return!
The reduced performance of Philippine shares over the past period is understandable as the interest rates have picked up significantly. As I explained the value of a share in an earlier article in this series, this means that the interest rate against which future profits are discounted increases, and hence the share prices decrease. However, as the increase in interest rates is a result of the current plans of high infrastructure investments to bring the country up to a more competitive level, we should see higher expected profits due to the improved competitiveness of the Philippine companies. These higher profits in reality should more than compensate for the reduction due to the increased discount rate. However the market has shown a lagging performance, and as the market is always right, this raises questions.
One of these questions is; 'What is the reason that the planned investments in infrastructure do not increase the profit expectations of the listed companies?' It seems that investors doubt the ability of the Government to execute the plans effectively, and the whole economy to benefit from these investments. Potential issues as major changes within the highest ranks in Government, stories of increasing corruption and a, lets say surprising, foreign policy do make it understandable that investors are not yet believing in the benefit for the economy of the planned investments. Alternatively they believe that the economy might benefit, but that there will be other players coming from abroad or emerging locally that will benefit much more than the currently listed enterprises and hence the effect on the PSEi is limited. Clearly the devaluation of the peso combined with the lagging performance of the index indicate that the expectations for the listed companies to run profitable business deteriorated under the current Government.
For investors the decison to hold or invest more depends on your view on the effectiveness of the infrastructure investments, the ability of the Government to curb corruption and the success of bringing international trade to a higher level. My son still did't make up his mind and put his headset on while going through his portfolio. Softly I hear the muffled sound of the Clash playing their old hit; 'Should I stay or should I go'.