Manila’s tax plan may reverse foreign fund exodus
PHILIPPINE equities can lose their tag as the only emerging Asia market to suffer foreign fund outflows this year – with a helping hand from President Rodrigo Duterte.
Strategists say progress on Duterte’s promised tax reforms is needed to bring back global asset managers, who have offloaded US$ 213 million ( RM959 million) of Manila-listed equities in 2017 while pouring US$ 6.8 billion into India and US$ 1.4 billion into Malaysia.
Investors are also looking for company profit growth to justify an index valuation that’s at the widest premium to emerging market peers in six months. Philippine stocks fell last Thursday, halting a three- day rally.
“The Philippines is a very attractive market to invest in but there are more obviously better opportunities elsewhere and there have been some headwinds in terms of the tax reform not passing, the earnings momentum depleting and also geopolitical risks,” Vanessa Donegan, who helps manage US$ 456 billion as managing director at Columbia Threadneedle Investments, said.
“We like the Philippines for its potential for increased infrastructure spending but how will the government get to finance that without getting this tax reform package through?”
Duterte has been a boon and a curse for stock traders, helping spark a rally before his May 2016 election through fiscal spending pledges and then spooking international investors with volatile responses to critics of his deadly anti- drug campaign and verbal attacks against the US.
His tax plan has yet to pass its first hurdle in Congress as lawmakers seek to replace his proposal, while Teneo Intelligence predicts a June target for the bill’s approval probably won’t be met.
Duterte’s tax package, which aims to raise levies on fuel and cars while cutting income taxes, is estimated to raise 163 billion pesos a year. The funds are needed to bankroll an ambitious US$ 160 billion infrastructure plan and Duterte’s war on drugs, while helping to preserve the nation’s investment- grade credit rating.
Uncertainty over the tax plan has also hurt the Philippine peso. It’s the worst-performing Asian currency this year, slipping 0.9
The Philippines is a very attractive market to invest in but there are more obviously better opportunities elsewhere and there have been some headwinds in terms of the tax reform not passing, the earnings momentum depleting and also geopolitical risks
per cent as the current account surplus is forecast by Fitch Ratings to turn into a deficit in 2017 after shrinking 92 per cent last year.
Strategists expect the peso to weaken another 2.6 per cent to 51.5 per dollar by the end of the year as the US Federal Reserve tightens monetary policy.
Still, there are signs sentiment toward the nation’s equities may be thawing.
Foreigners added US$ 136 million to the market this week, helping push stocks to a fivemonth high and pare outflows, which reached US$ 349 million in the first quarter.
Even if his tax reform is slow, Duterte’s other policies – from opening up more to China to increasing infrastructure spending – are helping drive an economy that’s forecast by the World Bank to expand close to seven per cent from this year until 2019, among the fastest globally.
While GDP growth remains favourable, Alan Richardson, a Hong Kong-based investment manager who helps manage US$ 173.5 billion at Samsung Asset Management, isn’t convinced that the tide has turned for Philippine stocks, preferring Singaporean and Malaysian peers.
“The pullout was caused by a lack of positive growth surprises and a lack of stimulus from the new government,” said Richardson, who has been underweight Philippine equities since the third quarter of 2016.
Foreign “fund outflows will stop when the above reverses or valuations come down to a level that’s attractive to history or regionally comparable.”
Shares in the Philippine Stock Exchange Index are trading at 17.8 times 12-month estimated earnings, the most expensive in the region and almost a fifth above their 10-year average.
The MSCI Asia Pacific Index is valued at 13.4 times, while a gauge of emerging markets trades at 12.1 times.
Stocks are hitting “toppish valuations” and this could spur profit-taking, according to Rizal Commercial Banking Corp. fund manager Nescyn Presinede, who said better-thanexpected earnings and weakerthan-forecast US interest rate increases could push the index beyond its 7,100 to 7,500 trading range. — WP-Bloomberg
Vanessa Donegan, managing director at Columbia Threadneedle Investments