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January 2011

The

MARKET CALL Capital Markets Research

FMIC and UA&P Capital Markets Research

Macroeconomy 2 Fixed-Income Securities 8 Equity Markets 13


Special Feature 18 Recent Economic Indicators 20 Contributors 23
Macroeconomy

Will Few Days Reverse Strong Fundamentals?


2

Is inflation rearing its ugly head again? Global and domestic financial market players seem to think so, given
the unabated increases in crude oil prices and sharp rises in agricultural commodity prices. As a consequence,
the fabled January effect did not materialize as both domestic bond and stock prices have tanked early in the
year.
In the Philippines, the figures for the economy remain robust and the inflation scare may just be a knee-jerk
reaction. The latest economic data, which simply reiterate the fundamental strength of the economy, should
probably speak best for themselves.

Meralco Sales Eases Further in December Figure 1 - Meralco Sales & Volume of Production Index
Meralco sales for 2010 Q4 did not fly high compared to Growth Rates (Year-on-Year)
the other quarters of the year. The total monthly sales 25 50
of Meralco started to weaken by October and followed Meralco Sales % Δ (Left Axis)
20 40
through for the remaining months of the last quarter of VoPI - Total Manufacturing % Δ (Right Axis)
2010. For December, a year-on-year (y-o-y) growth rate of 15 30
3.0% had been recorded. This was the lowest y-o-y uptick 10 20
of Meralco sales for 2010. This may also spell slower Gross
Domestic Product (GDP) growth in 2010 Q4. 5 10

0 0
The y-o-y growth of each sector remained positive for De-
cember. The figures indicated an easing of the pace com- -5 -10
pared to the previous month’s records largely due to base
-10 -20
effects. Residential sales grew a mere 2.8% as opposed to
5.1% for the previous month. Commercial sales registered -15 -30
a 3.3% uptick which was also lower than November's 5.7% Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
climb. Industrial sales slowed down the most from 8.7%
last November to 2.1%. Residential and Industrial sales Source: Meralco, National Statistics Office (NSO)
performed their weakest for the year in December. Look- With these considerations, we maintain our view that
ing at Meralco sales as a proxy variable of economic ac- 2010 Q4 GDP growth will be close to its preceding quar-
tivity (GDP), we can readily see that its performance last ters. The Agriculture sector is expected to swing to the
December was not as outstanding as the rest of the year. positive zone while Industry and Services will slow down
slightly. Compared to 2009, when the quarter-on-quarter
Despite the weaker momentum for the last quarter of
(q-o-q) growth from Q3 to Q4 declined due to the great
2010, Meralco electricity sales nevertheless increased
typhoons, there were no similar negative shocks in the lat-
by 6.6% over the same quarter last year (+3.6%) and was
ter half of 2010. With that said, a 7.2% GDP expansion for
even faster than Q3’s pace of 5.9%. Thus, we ought not to
2010 is still likely.
be disappointed with the current outcome. After all, the
Volume of Production Index (VoPI) was up by 16.2% in No- Inflation Resurgence Unlikely to Materialize in H1
vember, as 16 out of 20 manufacturing industries posted
The headline inflation rate for December remained at
strong gains. Similarly, imports for the same month ex-
3.0%, the same rate as November. This was a bit disap-
panded by 35.3%, faster than 26.4% in October, suggest-
pointing after having low inflation expectations for most
ing that December exports would remain robust.
of 2010. Meanwhile, the full-year inflation for 2010 rose

The Market Call - January 2011


Macroeconomy

FLW had the most significant change and it is attrib-


uted to the higher annual increase in crude oil prices in
December.

to 3.8% from 3.3% in 2009. This is well within the Bangko For the month-on-month (m-o-m) data, inflation slowed
Sentral ng Pilipinas’ (BSP) target of 4.5% +/- 1% and right down to 0.5% from 0.8% the previous month. This was
on the dot to our 3.7% outlook. Core inflation eased slight- due to the rapid deceleration in FLW (5.0% to 2.0%) and
ly from 3.5% last November to 3.4% in December, bringing FBT (0.7% to 0.4%). These rates were sufficient to more
the annual average core inflation down to 3.7% from 4.2% than offset the increase in Clothing from 0.1% to 0.3% and
in 2009. Services from 0.4% to 0.7%.

The steady y-o-y inflation of 3.0% for November and De- On a seasonally adjusted annualized rate (SAAR) basis, in-
cember was due to firmer prices of Fuel-Light-Water (FLW) flation’s pace eased from 11.3% in November to 6.6% in
tracked at 11.5%, slightly off from 12.0% posted in Novem- December. This brought about an average SAAR of 3.0%
ber and a slight but meaningful rise in Food-Beverage-To- for 2010. The SAAR of food items declined from 9.5% to
bacco (FBT) to 2.0% from 1.9% in the previous month. 5.6% in December due to stable rice prices. Non-food
Figure 2 - Inflation Rates Annualized (2006-2010) Seasonally SAAR fell from November’s 13.1% to 7.6% in December, as
Adjusted vs. Year-on-Year the pace of petroleum pump price hikes eased.
35%
Monthly S.A. Inflation Annualized Year-on-Year Inflation Rate There have been some concerns about possible inflation
30%
acceleration due to the continuous upswing in crude oil
25% and other commodity prices, as well as projected increas-
20% es in toll fees, transportation rates, and wheat and corn
15% prices. However, with winter ending, crude oil price up-
swing will likely take a pause, while food prices may be
10%
kept in check by stable rice prices due to its abundant sup-
5% ply. Thus, Q1 inflation rate may remain at 3.2% or lower
0% and not much different up to Q2.
-5%
-10%
Policy Rates Kept Unchanged
The Monetary Board (MB) decided to maintain the key
-15%
policy rates during its last policy meeting for 2010 on No-
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
vember 18. It retained the 4.0% for the reverse repurchase
Source: National Statistics Office (NSO) agreements (RRP) for overnight borrowing and 6.0% for
the repurchase agreements (RP) for overnight lending fa-
Clothing products’ prices also accelerated to a 1.9% growth cilities in the belief that these rates do not stoke inflation
in December from 1.7% the previous month. To offset the while promoting the needed economic expansion.
faster pace in these items, slowdowns were seen in Ser-
vices and Miscellaneous categories. Services eased from For the month of November, Reserve Money (RM) only
3.6% to 3.4% while Miscellaneous items decelerated from grew by 5.2% (y-o-y), half of October’s 10.4% growth, de-
1.2% to 1.1%. FLW had the most significant change and spite the 29.1% rise in Net Foreign Assets (NFA). Likewise,
it is attributed to the higher annual increase in crude oil after the double-digit growth rates of M2 and M3 in Sep-
prices in December when it went up by 19.7% to an aver- tember, they began to follow a downward path starting
age of $89.10 per barrel, West Texas Intermediate (WTI). October. M2 decreased from 7.7% to 7.4% while M3 de-
clined to 7.6% from the previous 7.8% record. With the
declining annual growth rates, money multiplier has in-
creased only to 4.0 from 3.8 in October.

The Market Call - January 2011


Macroeconomy

Year-to-date (YTD) export revenues for November


2010 amounted to $47.2 B, which was 34.5%
higher than the same period in 2009.

Figure 3 - M3 Money Supply Growth Rates (y-o-y) tive months. This should not cause any alarm since the
30% base effects of exports were no longer present as exports
already had a positive y-o-y growth in November 2009.
25%
For November export performance, manufactured prod-
ucts captured 85.7% of the total exports which was very
20%
close to the share of the same group a year ago. The de-
celeration of exports growth mirrored the performance of
15% the electronics sector, which saw an 8.5% gain compared
to 38.2% in October. This reflected the weakness in 7 of
10% the 9 electronic product categories. Fortunately, semicon-
ductors exports had increased by 19.6%, accounting for
5% 41.6% of total exports. A number of export products also
had remarkable y-o-y growths ─ Gold (208.5%), Petroleum
0% Products (176.1%), Coconut Oil (118.5%), Woodcrafts and
Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Furniture (53.3%), and metal components (32.5%).

Source: Bangko Sentral ng Pilipinas (BSP) For the m-o-m data, exports declined by 13.4% from $4.8
B to $4.1 B. This is in spite of the enormous m-o-m ex-
Meanwhile, the Special Deposit Accounts (SDA), which is port growth of product groups such as petroleum prod-
also being watched closely by the BSP, has increased to ucts which had a 280.5% growth and forest products
P1.2 Tr in November. This grew massively by 106.0% from with 178.2%. These surges were quickly counterweighed
year-ago levels. Banks continue to be lured to place their by drops in other product groups like mineral products
money in the BSP vaults because of the high SDA rate (-55.7%), Agro-based products (-20.2%) and manufactured
which leaves less money going around to be lent for pro- products (-16.0%).
ductive uses.
Figure 4 - Monthly Exports Growth Rates (y-o-y)
Given the low annual growth rate of RM and the current
low expectation for inflation during the first half of 2011, 60%
BSP should seriously consider reducing the SDA rate as
45%
this serves as the floor for interest rates. Doing so would
facilitate more liquidity and the attainment of the 7-8% 30%
GDP growth target for this year.
15%
Sans Base Effects, Nov Exports Up 11.2%
In November, exports expanded by 11.2% to $4.1 B. This 0%
was a sharp slowdown from the previous month’s growth
-15%
of 27.4%. Year-to-date (YTD) export revenues for Novem-
ber 2010 amounted to $47.2 B, which was 34.5% higher -30%
than the same period in 2009. Notably, since the highest
monthly exports level was recorded at $5.3 B in Septem- -45%
ber, exports have actually been declining for two consecu- Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10

Source: National Statistics Office (NSO)

The Market Call - January 2011


Macroeconomy

OFW remittances remained stable at $1.6 B for No-


vember, 10.5% higher compared to the same month
in 2009.

For the month of December, we expect export revenues to Figure 5 - OFW Remittances Growth Rates (y-o-y in US$ and
remain above $4 B and break the full-year record of $50.5 PhP Terms)
B posted in 2007. Exports in 2010 should end up at least 40%
US$
30% higher than 2009. A big leap in electronics imports
Php
and double-digit manufacturing sector growth in Novem- 30%
ber supports this view.
20%
Looking forward, due to the absence of base effects for
2011, we project export growth to be around 13.0-15.0%
10%
on account of a better-than-expected growth in the US
and continued robust expansion in China and the East
0%
Asian region.

OFW $ Remittances Up 10.5% in Nov -10%

After hitting an all-time high of $1.7 B in October, OFW


remittances remained stable at $1.6 B for the month of -20%
November, 10.5% higher compared to the same month in Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
2009. The growth rate was slightly higher than the 9.3%
Source: Bangko Sentral ng Pilipinas (BSP)
y-o-y growth in October and second only to September’s
10.6% uptick. As of now, the BSP is projecting a total of $18.8 B for the
whole year of 2010. Achieving this target is not far from
From January to November 2010, remittances amounted happening because the peso was somewhat softer in
to $17.1 B, or 8.1% higher than the same period in 2009. December than in November. The weaker local currency
The vigorous growth can be attributed to the versatility of would provide a better stimulus to domestic spending as
Filipinos that enabled them to meet the expectations of the same amount of dollars will increase the peso amounts
employers in different countries with their continuously received by remittance beneficiaries. Also, the fact that
growing demand for professional and skilled laborers. The historically, more US$ remittances are sent during Decem-
diversification of host countries also contributed to the ro- ber should provide confidence that the monthly remit-
bust remittance performance. Finally, the incessant efforts tance will not fall behind past figures.
of the government in negotiating with other countries for
a bilateral labor cooperation agreement and the easier Peso Reverts to Depreciation Mode in New Year
and inexpensive means of sending remittances back home
The peso traded sideways at the start of the year with a
should also be acknowledged for aiding the OFWs.
somewhat softer bias. For January, the Philippine Peso
A positive news was the 2.2% increase (y-o-y) in the peso (PhP) started climbing beyond the P43/$ level up to the
value remittances, a slight improvement from the 1.4% P44/$ plane. The external headwinds appear to be more
posted in October. Even with the huge increase in the influential for the month as fears of a resurgence of infla-
amount of dollars sent, it was offset by the peso apprecia- tion in Asia made foreign investors more timid.
tion. From the P47.0/$ in November 2009, the peso got
The peso appreciation in 2010 was attributed to foreign
stronger by 7.5%, reaching P43.5/$ in November 2010.
capital flows to the country’s financial markets, where
The December peso value of remittance performance
high premiums on T-bonds and self-sustained stock price
should be better as the peso appreciation slowed down to
growth were the rule for the first 7 months of the year.
5.2% for the said month.

The Market Call - January 2011


Macroeconomy

The dollar reserves of the BSP rose to an all-time


record of $62.1 B in December 2010.

Foreign Portfolio Investments (FPI) in stocks, securities, foreign investors’ cut-loss limits had been crossed leading
and currency markets for the entire 2010 have increased to lower stock and bond prices, reversing a 5-month rally
the net inflows to $4.6 B from $388 M in 2009. With OFW that ended in November. Their demand for dollars, thus,
remittances totalling $17.1 B for January to November, weakened the peso.
the dollar reserves of the BSP rose to an all-time record of
$62.1 B in December 2010, equivalent to 10.2 months of Similarly, large emerging countries like Brazil had been
imports, and representing a 40% increase from year-ago talking of “currency wars” as their currencies appreci-
levels. ated significantly during the past year. These moves, tan-
tamount to capital controls, made foreign investors wary
Figure 6 - Daily Peso-Dollar Exchange Rate
about getting their funds frozen in emerging markets.
46
For the first quarter of 2011, we expect the peso to be
45 within the range of P43.50 – P45.00/$ and will continue to
be volatile, should the BSP allow it to move freely. A likely
44
scenario, on the other hand, is that the BSP will intervene
to prevent sudden sharp movements in the exchange rate.
Nevertheless, the current weakening bias should remain,
43
which is technically supported since the recent rates have
been above their 30-day moving averages (MA) and is ap-
42
proaching the longer-term 200-day MA.
Peso/Dollar Exchange Rate 30 Day Moving Average
41
Outlook
200 Day Moving Average
The recent Q4 GDP rebound contradicted what most ana-
40
lysts saw as an economy that was slowing down. While
Oct-10 Nov-10 Dec-10 Jan-11
y-o-y growth was 7.1%, seasonally adjusted quarter-on-
Source: National Statistics Office (NSO) quarter growth was a hefty 3%, a clear reversal of the
easing in the previous 2 quarters. This outcome gives cre-
At the onset of 2011, investors’ risk appetite was whet- dence to our belief that the 34-year GDP growth record of
ted by expectations of another strong year for Asia. This 7.3% in 2010 was not just about election spending.
is in comparison to the anemic growth projections for ad-
vanced economies, and the easing of euro-zone worries • Dun & Bradstreet’s Business Optimism Index for 2011
after Japan pledged that it would aide Ireland. However, Q1 shows an overall improvement from the previous
only after a trading week into 2011, the peso began to quarter. Specifically, while volume of sales and net
slowly depreciate as the inflation scare surfaced among profits continued to promise a better quarter ahead, it
emerging markets and expectation of stronger US recov- was the indexes for Employment and New Orders that
ery loomed. Thinner inventories in the US provoked a showed the biggest gains. If firms are planning to hire
jump in crude oil prices above $90/barrel, at the same more workers compared to 2010 Q4, then the New Or-
time that agricultural commodity prices (wheat, corn, ders they expect to move up are probably going to ma-
and soybeans) rose steeply due to poor harvests. The rise terialize and add fuel to the growth prospects for H1.
in oil prices also caused lack of liquidity as domestic oil
companies spent more dollars to import oil. To top it all,

The Market Call - January 2011


Macroeconomy

We think that exports will slow down a little bit


more in early Q1, but will return to double-digit
growth by Q2.

• We think that the inflation scare is overblown, given


that rice stocks are plentiful, harvests are quite promis-
ing according to Department of Agriculture experts, and
crude oil prices are likely to ease with the off-winter sea-
son and the eventual return of 200,000 barrels per day
crude from Alaska which was closed late last year due
to an explosion. Meralco rates are also expected to be
slightly lower in January and February.

• The tax collection efforts of the country appear to be


making some headway. While no official figures for De-
cember will be available until February 20, in 3 of the 4
months from August to November, BIR collections grew
in excess of 15% (our critical growth benchmark). This
has given the agency more optimism to meet its 2011
targets.

• Since we do not expect a sharp rise in inflation in H1,


we also do not think the BSP will raise policy rates in the
first half of the year, despite robust GDP growth. This is
because inflationary forces should remain in check.

• We think that exports will slow down a little bit more


in early Q1, but will return to double-digit growth by
Q2 on the back of stronger-than-expected US growth in
H1, while China and East Asia, and ASEAN provide ad-
ditional export demand as they boost their domestic
economies.

• With OFW remittances retaining its vitality in Q1, this


will not be sufficient to offset the slower export growth
and the exit of portfolio capital, and so the exchange rate
will have a slight depreciation bias during the quarter.

Forecasts
Rates Jan Feb Mar Apr
Inflation (y-o-y%) 3.2% 3.0% 3.2% 3.0%
91-day T-Bill (%) 2.51 3.17 3.3 3.3
Peso-Dollar (P/$) 44.17 44.00 43.88 44.35
10-year (%) 5.88 6.25 6.11 6.29

Source: Authors’ Estimates

The Market Call - January 2011


Fixed Income Securities

Early Jitters in the Philippine Bond Market


8

The New Year came with encouraging news: headline inflation for the previous year averaged 3.8%, which
was at the lower end of the BSP's target range of 3.5% to 4.5%; Moody's Investors Service raised the credit
outlook on National Government's (NG) foreign and local currency bonds from stable to positive; and the Basel
3 banking and financial markets reform were finally adopted.
Unfortunately, as the month progressed, many foreign investors had chosen to lighten up on Philippine
bonds and stocks. The specter of a resurgence in inflation (especially in India and China), higher crude oil
and commodity prices, a rise in value-added taxes (VAT) in Europe, and an improving US economy were very
compelling reasons for bringing funds back to developed markets.

Primary Market: Doubts Emerge after a Good Start Market players chose to keep funds in short-term govern-
President Aquino signed a P1.6 T budget for the fiscal year ment securities (GS), particularly 91-day and 182-day T-
2011, a 14% increase from last year’s budget of P1.5 T. bills at the start of the year; decreasing their yields by 7.50
This highly stimulative budget targets a budget deficit of and 8.70 basis points (bps) to record lows of 0.70% and
P298.6 B in 2011, or 3.3% of projected Gross Domestic 1.56%, respectively. Correspondingly, there was a slack in
Product (GDP). With the changed attitude abroad, the NG demand for 20-year notes (offered on January 18) as the
may have to finance most of this from the local financial total amount tendered was lower than what the BTr of-
markets until the global markets regains confidence over fered. The third auction of the year simply confirmed mar-
actual inflation rates in the coming quarters. ket players’ fears. The final straw was drawn in the last
auction of January where market players asked for higher
The first two auctions for the year continued to reflect yields even for the short-term T-bills (by as much as 150
positive sentiment among investors. To keep debt yields in bps) and the NG dutifully rejected the entire P7.12 B ten-
line with secondary markets, the Bureau of the Treasury dered by market players for P8.5 B of T-bills on offer.
(BTr) made only a partial award for the first auction of the
year─ the reissued 5-year bonds provided a 4.67% yield,
some 10 basis points (bps) higher than the previous 5-year
auction.

T-Bills and T-Bonds Auction Results


Tendered ÷
Date T-Bond/T-Bill Offer (PhP B) Tendered (PhP B) Awarded (PhP B) Average Yield Change bps
Offered
4-Jan 5-year 9.00 13.70 7.03 1.52 4.67 10.3
10-Jan 91-day 1.00 2.76 1.00 2.76 0.70 -7.50
182-day 3.50 13.4 3.50 3.83 1.56 -8.70
364-day 4.00 11.06 4.00 2.77 2.46 7.30
18-Jan 20-year 9.00 8.021 4.12 0.89 8.02 -49.60
24-Jan 91-day 1.00 1.71 0.00 1.71 0 –
182-day 3.50 3.19 0.00 0.91 0 –
364-day 4.00 2.22 0.00 0.56 0 –
Totals All Auctions 35.00 56.06 19.65 0.62 – –

Source: Bureau of the Treasury (BTr)

The Market Call - January 2011


Fixed Income Securities

Secondary trading at the start of 2011 was brisk,


showing a 144.3% growth of trade volume.

Secondary Market: Yield Curve Moves Up Slightly Figure 8 - Trade Volume (in billions)

Figure 7 - FXTN Yields 100

10.0 200
18-Jan-10 18-Nov-10 80
15-Dec-10 24-Jan-11
8.0 150 2010 YTD (Jan 16) = P91 B
60
2011 YTD (Jan 14) = P81.7 B
6.0 100
40

4.0 110 50
20
50
20
2.0 0
-45 0
Dec 20-24 Dec 27-31 Jan 3-7 Jan 10-14
0.0 -50
Source: Philippine Dealing and Exchange Corp. (PDEx)
5-62 7-43 10-42 10-48

Source: First Metro Investment Corp. (FMIC) Secondary trading in corporate bonds was clearly more
active in December 2010 compared to the same month of
Among the biggest casualties of market fears of higher in- the previous year. The state-run PSALM was most active
flation rates was the Fixed Income Treasury Notes (FXTN) in 2010 trades amounting to P428 M. San Miguel Brewery
market. Yields across the FXTN curve have been rising (SMB) took over the second spot from Energy Develop-
since last month except for the 3-year FXTN series 7-43. ment Corporation (EDC) with trading volume of its debt
The highest jump among outstanding notes was in the instruments reaching P185 M. Metrobank (MBT) pushed
FXTN series 10-42 which rose 110 bps in yield. FXTN series EDC down further by getting P60.87 B of its debt papers
3-16 and 10-48 had risen by 50 bps and 20 bps respec- traded for the month.
tively. However, in the new 25-year benchmark bond, the
yield moved only marginally. Figure 9 - Corporate Trading (in millions)

500
Secondary trading at the start of 2011 was brisk, show- December 2009 December 2010
ing a 144.3% growth of trade volume in the first week of
January from the last week of December 2010. The first 400
and second week of January gathered a total of P86.1 B
and P77.3 B, respectively. Although the double-digit fig- 300
ures pale in comparison with the record trading volumes
in the middle of 2010, 2011 year-to-date (YTD) remains
200
way above last year’s. The 2011 YTD (January 14) of P81.7
B overshadowed 2010 YTD (January 15) of P63 B by almost
30%. 100

0
PSALM SMB MBT EDC GLO

Source: Philippine Dealing and Exchange Corp. (PDEx)

The Market Call - January 2011


Fixed Income Securities

At the start of the year, even giants in the corporate


world were mulling over issuing more long-term
peso debt papers.

10

Corporate Issuances: • Megaworld (MEG) launched its P5 B fixed rate bond cam-
With banks' Single Borrower’s Limits (SBL) being exceeded paign with the highest credit rating (AAA) from Credit
by large firms, these companies have been turning to the Rating and Investors Services Philippines, Inc. (CRISP), a
bond market to fund their various capital expenditures new rating agency in the country. With a 15-year tenor
and infrastructure developments. and coupon rates yet to be released, these bonds are to
be issued to institutional and retail investors through a
• Only recently, Ayala Land, Inc. (ALI) raised P10 B worth of public offering. Proceeds from the bond issue would be
fixed-rate corporate bonds to fund capital expenditures used to partly fund capital expenditures over a 3-year
─ P5.7 B in 5-year notes with rate of 5.625%, P3.3 B in period beginning 2009, especially the development of
10-year notes with a rate of 6.875%, and P1 B in 15-year its North Bonifacio Central Business District project.
notes with a rate of 7.5%. Additionally, strong investor
demand led orders amounting to P17.5 B, an oversub- • The SMB energy unit started its road show for an up-
scription of 75%. Excluding new issuances, a number of coming $500 M bond issue. With a guidance as low as
investors holding P875 M worth of 7- and 10-year notes 6% and a prospective tenor of 5 years, the SMB group
issued last 2006, maturing in 2013 and 2016 accepted a hopes to raise funds for its transformation from a food
prepaid offer through a liability management exercise. to a power-based conglomerate.

At the start of 2011, even giants in the corporate world ROPs:


were mulling over issuing more long-term peso debt pa- A red flag has been raised on Asian currencies due to in-
pers. Corporate bond markets, with emphasis on the real flationary speculations on yields. According to National
estate and energy sectors, will remain active in the coming Association of Securities Dealers Automated Quotations
months. (NASDAQ), the Philippines’ peso denominated global
bonds continued to sell voluminously as cumulative losses
• On January 14, EDC raised $300 M for corporate and for the first two weeks of the month reached almost 10%.
capital expenditures. The paper has a 10-year tenor and Despite this fact, however, yields on ROPs across the curve
a coupon of 6.5% and was offered at par. Proceeds will edged lower with 32.3 bps, 35.6 bps, 38.3 bps, and 28.3
be used for capital expenditures, debt servicing, and bps on ROP14, ROP16, ROP19, and ROP32, respectively, as
other general corporate purposes including the fund- US Treasury benchmark yields eased.
ing of an 86- megawatt wind farm in Ilocos Norte. These
debt papers will not be traded in the Philippines. This inflationary scare of foreign investors has led to the
widening of the country’s spread versus US Treasuries.
• ATR KimEng Asset Management deployed an open-end- This year’s spread (January 21) widened from last year’s
ed bond auction with a mutual fund that aims to de- (December 17) 115 bps to 162 bps ─ a sharp 47 bps in-
liver superior risk-adjusted returns consistently over the crease. Nevertheless, compared to last year of the same
long-term, giving bond-holders more breathing space period (January 22), spreads have actually narrowed by 36
for market volatility and adjustments of portfolios. Mini- bps aided by favorable macroeconomic environment left
mum subscriptions are quoted at $2000 and additional by the year 2010.
subscriptions are at $500. Capital raised will be invested
in global and domestic securities issued by sovereign na- Year-long changes in yields have amounted to a decrease
tions with credit ratings not lower than BB- and in cor- of 160.6 bps at the front end of the curve and 100.3 bps
porate securities denominated in major currencies. at the back end while the belly has ROP-16 easing by 210
bps.

The Market Call - January 2011


Fixed Income Securities

The ROPs market is expected to be volatile as the


euro-zone debt woes linger on with little clarity on
a more permanent resolution.

11

Figure 10 - ROPs ment of inflationary expectations was evident as authori-


ties increased reserve requirements to 19%.
8 150
14-Jan-10 17-Nov-10
Indonesia: 1-, 5- and 10-year bond rates decreased by 4.8
17-Dec-10 18-Jan-11
bps, increased by 90.5 bps, and increased by 120.1 bps
6 100
m-o-m respectively. The Bank Indonesia rate is pegged
at 6.5% while Moody’s January outlook for the country is
stable.
4 50

Malaysia: With the highest inward foreign direct invest-


ments in the region, yield rates are steadily decreasing,
2 0
reflecting the strong demand for domestic debt instru-
-32.3 -28.3
-35.6 -38.3 ments. 1-, 5- and 10-year bonds registered incremental
0 -50
yield changes, decreasing by 2.9 bps, increasing by 2 bps,
and increasing by 21.2 bps. Maybank Investment Bank’s
ROP14 ROP16 ROP19 ROP32
economists expect inflation to rise 2.5% in 2011, thus
Source: Bloomberg overnight policy rates have been pegged at 2.75%.
The ROPs market is expected to be volatile as the euro-
zone debt woes linger on with little clarity on a more per- Thailand: 1-, 5- and 10-year bond rates increased by 32
manent resolution. The recent political and financial scare bps, decreased by 10.2, bps and increased by 11 bps m-
in Egypt will also add pressure to ROP yield spreads. o-m respectively. 1D and 3M interest rates had latest rates
of 2.25% and 2.39%, by the third week, closely following
ASEAN+1 Market Thailand’s 1-day repurchase rate of 2.25% from an in-
crease of 25 bps.
The corporate bond market of emerging East Asia grew
by 23.8% year-on-year (y-o-y) while local currency gov- Figure 11 - ASEAN+1
ernment bonds were 14.6% higher y-o-y, a slower growth
compared to past years. While Euro and US dollars are still 12
having volatile sessions in currency markets, expectations US PRC Indonesia
10
of flatter yield curves may be reasonable for the ASEAN Malaysia Thailand Philippines
countries.
8
US: Its yield curve shows that debt papers have retained
6
the momentum of steadily increasing yields, especially in
the longer end.
4
PRC: Latest yields for 1-, 5- and 10-year bonds increased
2
by 11 bps, decreased by 12 bps, and increased by 8 bps
month-on-month (m-o-m) respectively. 1-year deposit
0
and 1-year lending rates rose to 2.75% and 5.81% respec-
tively, a change of 25 bps to both. China is considering to 1 5 10
raise its inflation target from 3 to 4 % as consumer prices Source: Bloomberg
hit 4.4% in October and increased to 5.1% last November
y-o-y. Further monetary tightening to prevent develop-

The Market Call - January 2011


Fixed Income Securities

Because the prospects of higher yields are quite real, inves-


tors and market players will be quite sensitive to official
inflationary figures for guidance.

12

Outlook
With domestic bond yields having adjusted to higher in-
flationary expectations in the opening weeks of 2011,
many investors should be more comfortable with the cur-
rent level of yields, at least for the time being. Because
the prospects of higher yields are quite real, investors and
market players will be quite sensitive to official inflation-
ary figures for guidance. The bottom line really depends
on how short-term rates behave in the coming months.

The Market Call - January 2011


Equity Markets

Reallocation and Inflationary Fears


13

January has been very challenging for Philippine equities market. Local risky assets have been volatile and this
serves as a reminder of risks involved in the market – external and local. The recent sell-off in the Philippine
equities market is reminiscent of the fear-based sell-offs that plagued equity markets in early 2010 (i.e.
emergence of the euro-zone debt crisis). Bearish price actions led to the PSEi breaking down the 4,000 support
level on January 21, 2011, a level that was deemed to be strong. In light of the recent sell-offs, we believe
that the reasons for the local market’s weakness were associated with the reallocation of global portfolios
in developed markets (DM), especially in US equities, for better earnings potential and fears of tightening
contagion from our Asian neighbors.

Figure 12 - PSEi “February 2010 Lows” Figure 13 - Foreign Activity


5 6 140 4900
Volume (in billions), right axis PSEi (in thousands), left axis
Foreign Buying (in billions), left axis
50-Day MA 100-Day MA 120 4200
4.5 5
200-Day MA Foreign Selling (in billions), left axis
100 3500
4 4
PSEi, right axis
80 2800
3.5 3
60 2100
3 2
40 1400
February Lows
2.5 1 20 700

2 0 0 0
Jan Mar May Jul Sep Nov Jan Sep-08 Apr-09 Nov-09 Jun-10 Jan-11

Source: Yahoo! Finance Source: Philippine Stock Exchange (PSE)

Preference on US Equity Markets Strong Macro Correlation – there are increasing signs
Positive macro backdrop remains intact (see Macroecon- over the past few months that economic growth will be
omy section), while the recent pullback has made valu- stronger-than-expected in the US. The economic recovery
ations attractive. Regardless of these, foreign investors appears to be holding up: consumption is supported by
continue to sell Philippine equities for potentially stron- improving labor markets, credit growth, low/negative real
ger market returns in US equities this year (as of January interest rates, and policy support. Having said these, there
28, 2011, foreigners were net sellers by P3.1 B). Accord- is plenty of room for more positive macro data surprises
ing to data from Emerging Portfolio Fund Research (EPFR) that would translate to further upsides in US equities.
Global, fund flows into US equities significantly increased
last December 2010. This is consistent with our view that
funds are being reallocated to the US. The reasons behind
the global portfolio reallocation are:

The Market Call - January 2011


Equity Markets

Fears and uncertainties surrounding the ongoing


tightening in emerging markets (EM) have de-
pressed most Asian equity markets.

14

Figure 14 - Global Equity Fund Flows Proliferation of Mergers & Acquisitions (M&A) – prospects
of an increase in M&A activity is highly likely in 2011. Its
drivers are: 1) extraordinary high corporate cash levels; 2)
the need to rationalize capacity in a low utilization envi-
ronment; and, 3) depreciated dollar makes US companies
attractive targets to foreign investors.

Other Potential Positive Risk Events – 1) Historically, large


returns had been made in the S&P 500 after mid-term
elections. 2) Improving confidence will likely result to
overweighing allocations in US equity markets. 3) Buyback
of shares by US companies will likely continue in 2011.

Monetary Tightening Contagion

Source: EPFR Global Asian Indices Year-to-Date Performance


Countries Index YTD Performance (as of January)
Earnings Continue to be Robust – evident in the fourth India SENSEX -10.64%
quarter earnings season, US corporate earnings data con-
Indonesia JKSE -7.95%
tinued to beat expectations. Such figures call for stronger
earnings growth estimates (+14% for the S&P 500) and for Philippines PSEI -7.61%
higher odds for better earnings revisions in US equities. Thailand SET -6.65%
Moreover, with US 10-year benchmark rates trading at Shanghai SSEC -0.62%
historical lows, valuations in S&P 500 component stocks
Singapore STRAITS -0.32%
remain at attractive levels.
Malaysia KLSE 0.07%
Figure 15 - S&P Valuations Japan NIKKEI 0.09%
8 South Korea KRX 0.32%
Dividend Yield minus 2 yr T-Bond Yield
Earnings Yield minus 10 yr T-Bond Yield Taiwan TWII 1.45%
6
Hong Kong HANG SENG 1.79%

4 Source: Bloomberg and Yahoo! Finance

2 Fears and uncertainties surrounding the ongoing tighten­


ing in emerging markets (EM) have depressed most Asian
0 equity markets, including the Philippines. The sharp jump
in 10-year Philippine benchmark rates reflects rising infla­
-2 tion expectations, increasing the odds of tightening. How­
ever, we believe monetary tightening is valid in most EM
-4 countries (China, Brazil, Indonesia, Thailand, and etc.) but
Jan-06 Nov-06 Sep-07 Jul-08 May-09 Mar-10 Jan-11 unfounded in the Philippines. Inflation for December 2010
Source: Bloomberg
was at 3.0%, even less than the lower interval of Bangko
Sentral ng Pilipinas’ (BSP) inflation target of 4.5%+/-1%

The Market Call - January 2011


Equity Markets

The PSEi declined by 7.61% this month as foreign investors


became net sellers.

15

for 2010. We expect this trend to continue in the first few Currently, BPI is set to purchase a trust unit of ING Bank on
months of 2011, regardless of rising oil prices and the March. Performance of these major banks will be further
front loaded increase in government spending (see Mac­ scrutinized as they release their 2010 annual reports.
roeconomy section).
12/30/10 1/31/11 %
Company Symbol
Close Close Change
Sectoral Performance
Meralco MER 228.00 215.00 -5.7%

Monthly Sectoral Performance Aboitiz Power AP 31.10 27.75 -10.8%

30-Dec-10 31-Jan-11 Energy Development Corp. EDC 5.87 5.79 -1.4%

Index % Change Index % Change San Miguel Corporation SMC 163.80 168.80 3.1%

PSEi 4,201.14 6.26% 3,881.47 -7.61% Jollibee Foods Corp. JFC 88.90 75.00 -15.6%
Financial 961.47 5.40% 870.86 -9.42% Source of Basic Data: PSE Quotation Reports
Industrial 7,220.61 8.43% 6,764.31 -6.32%
The Industrial sector declined by 6.32% with all the ma-
Holdings 3,388.74 5.97% 3,126.45 -7.74%
jor companies under the sub-index turning red except for
Property 1,582.47 8.66% 1,464.21 -7.47%
SMC. SMC continues its expansion as it plans to purchase
Services 1,590.40 5.58% 1,536.06 -3.42% the stake of an Australian mining firm in the $5.2B Tam-
Mining and Oil 13,947.58 15.53% 13,826.70 -0.87% pakan copper-gold project. MER was allowed to hike its
Source of Basic Data: PSE Quotation Reports distribution rates by P1.6464 per kilowatt-hour (kWh).
The company also plans to open its first power plant in
The PSEi declined by 7.61% this month as foreign inves- Calamba in the first quarter of next year. The power plant
tors became net sellers. All the sub-indices were in the red will bring down power costs thus raising returns. Mean-
with Financial and Holdings sectors as the largest contrib- while, AP dropped by 10.8% due to the local government's
utors to the fall while the Property sector followed closely foreclosure of its Pagbilao power plant for non-payment
behind. The Mining and Oil sector had the least decline of property taxes.
of 0.87% because of record-high copper prices as well as
the increase in copper shipments of major companies like 12/30/10 1/31/11 %
Company Symbol
Philex. Close Close Change
Ayala Corp. AC 394.00 340.00 -13.7%
12/30/10 1/31/11 % Metro Pacific Investments MPI 3.89 3.68 -5.4%
Company Symbol
Close Close Change
SM Investments Corp. SM 543.00 470.00 -13.4%
Metrobank MBT 72.00 64.90 -9.9%
DMCI Holdings, Inc. DMC 36.00 33.75 -6.3%
Banco de Oro BDO 58.50 50.80 -13.2%
Source of Basic Data: PSE Quotation Reports
Bank of the Philippine Islands BPI 59.00 51.50 -12.7%
Source of Basic Data: PSE Quotation Reports The Holdings sector posted a 7.74% decline this period led
by AC and SM. This is despite SM’s plans to add seven new
The Financial sector had the biggest fall by 9.42% this peri- malls, adding a total of 400,000 square meters (sq. m.) to
od with the major banks under the sub-index turning red. its commercial area for lease. The company will also part-
Large banks BPI and MBT raised cash from new shares sold ner with local government units to convert public markets
in the market. MBT raised P10 B by listing 200 M addi- into formal retail malls. SM Dasmariñas in Cavite will be
tional shares at P20 par value while BPI raised P10 B worth the pilot test project which will cost P500 M. In the agree-
of capital last August, both through special rights offering. ment, SM cannot increase rental rates to public market
tenants beyond the approved fees.

The Market Call - January 2011


Equity Markets

The Mining and Oil sector had the smallest


loss this period as companies under the sector
posted gains.

16

12/30/10 1/31/11 % that runs in a span of 9,620 km. connecting Asia to the
Company Symbol
Close Close Change United States. The company also revealed a hyperspeed
Ayala Land Inc. ALI 16.46 14.70 -10.7% broadband plan that can reach 100 megabytes per second
SM Development Corp. SMDC 9.00 7.90 -12.2% (mbps) using fiber-optic technology.
Robinsons Land Corporation RLC 16.30 14.02 -14.0%
Megaworld Corp. MEG 2.48 2.10 -15.3% 12/30/10 1/31/11 %
Company Symbol
Close Close Change
Source of Basic Data: PSE Quotation Reports Philex Mining Corporation PX 16.10 15.24 -5.3%
Semirara Mining Corp. SCC 185.00 198.90 7.5%
The Property sector declined by 7.53% this month. The
Nickel Asia Corp. NIKL 16.3 19.54 19.9%
fall in the sector is attributed to the rising 10-year T-bond
Source of Basic Data: PSE Quotation Reports
yields and rising inflation expectations. Despite this, com-
panies plan to expand as they enter massive projects this The Mining and Oil sector had the smallest loss this pe-
year. MEG just entered in a huge housing program, build- riod as companies under the sector posted gains led by
ing 18,673 residential units catering to 48,000 families. NIKL followed by SCC. The whole sector in general had a
Some of its other projects include developments in Busi- remarkable performance as rising copper prices comple-
ness Process Outsourcing (BPO) and tourism. Meanwhile, mented hikes in copper shipment reported by PX and
ALI embarked on a joint venture with Anflo Management several other companies. PX in particular increased ship-
and Investment Corp. in building a boutique hotel called ments by 36.17% to P12.95 B in 2010. Meanwhile, SCC
Abreeza Complex in Davao which will have a commercial expects up to 7 M metric tons this year in coal output,
mall, several residential condominium units and BPO fa- same as last year. Despite the flat output, the company
cilities over a 10-hectare land. The complex is aimed to expects growth due to rising coal prices brought by the
cater to the growing number of visitors in the city. RLC, major flooding in Australia that affected coal mines. Coal
on the other hand, together with SMDC and ALI, joined prices have increased around 15% to 20% from last year.
the bid to acquire the state-owned Food Terminal Inc., a
food processing and consolidation center for agricultural Monthly Turnover
products.
Yearly Turnover (in millions)
12/30/10 1/31/11 % Total Turnover Average Daily Turnover
Company Symbol
Close Close Change
Sector Value % Change Value % Change
Philippine Long Distance Tel. Co. TEL 2,554.00 2,460.00 -3.7%
Financial 10,515.6 -33.8% 500.74 -37.0%
Globe Telecom GLO 800.00 771.00 -3.6%
Industrial 36,410.7 21.8% 1,733.84 16.0%
Manila Water Company MWC 19.18 18.18 -5.2%
Holdings 19,357.4 -30.6% 921.78 -33.9%
Source of Basic Data: PSE Quotation Reports Property 19,131.1 49.7% 911.01 42.6%
The Services sector posted a loss of 3.42%. TEL declined Services 15,082.4 -11.7% 718.21 -15.9%
marginally as its subsidiary, Smart Communications, Inc., Mining and Oil 11,239.0 68.5% 535.19 60.5%
ended the year with 45 M subscribers, 9% higher from Total 111,736.4 1.4% 5,320.78 -3.4%
2009. Meanwhile, a better outlook for GLO is seen as it Foreign Buying 40,596.9 -13.8% 1,933.19 -17.9%
increases international network capacity by the activation Foreign Selling 44,752.8 -8.0% 2,131.08 -12.4%
of Unity Cable System, a submarine trans-pacific cable Source of Basic Data: PSE Quotation Reports

The Market Call - January 2011


Equity Markets

Total turnover increased this month by 1.4% with


the Industrial, Property, and Mining and Oil sectors
as the biggest contributors.

17

Total turnover increased this month by 1.4% with the In-


dustrial, Property and Mining and Oil sectors as the biggest
contributors. Even with expected inflation and monetary
tightening, these sectors were still able to place positive
values.

Foreign investors became net sellers this month as they


transfer their investments to other markets due to bearish
sentiments across EMs. This is coupled with the decline of
foreign participation this month to 38.19% compared to
an average of 46.73% for the last six months of 2010 and
40% for the entire year.

Outlook
Near-term – the next few months will be very challenging
for the Philippine equities market despite positive macro
and micro backdrop. Fears of rising inflation will likely stay
with us for some time, while continued improvements in
US economic data will continue to suck funds out of EMs.
Hence, we expect foreign selling to continue. We prefer to
reduce risk exposure and be guided by the direction of the
10-year Philippine t-bond yields.

Long-term – we reiterate our view on a long-term positive


perspective regarding the Philippine equities market given
that macro fundamentals remain supportive. The recent
sell-offs present good buying opportunities once inflation
fears are resolved and US equities become expensive. In
our view, local equities market weakness is front end load-
ed and is likely going to outperform in the 2nd half.

The Market Call - January 2011


Special Feature

Screening for Oversold and Overbought Stocks


18 By: Reuben Mark A. Angeles and Ghia Paula Yuson, Research Analysts First Metro Securities Brokerage Corp.

I. Joel Greenblatt Inspired Screen


Methodology:

• Inspired by Joel Greenblatt’s “Magic Formula Investing”


• Stocks are ranked based on 2 factors: return on invested capital (ROIC) and the enterprise multiple (EV/EBITDA)
• Stocks with high ROIC and low EV/EBITDA are considered oversold and most preferred
• While stocks with low ROIC and high EV/EBITDA are considered overbought and least preferred
• This screen excludes stocks with negative ROIC & EV/EBITDA
• Given the nature of the 2 factors, the screen excludes Financial stocks
• Note that the screen does not discriminate whether the issues to be filtered in are illiquid or not as it only takes
into account ROIC and EV/EBITDA

Oversold (Most Preferred) - Joel Greenblatt: High ROIC and Low EV/EBITDA Relative Performance
Company Ticker Industry Group Price 26-Jan-11 Mcap (Pmln) ROIC EV/EBITDA 3m 12m
Alaska Milk Corp. AMC Consumer P13.22 11,648 36.78% 2.816 1.69% 88.86%
GMA Network, Inc. GMA7 Media P6.90 23,191 25.39% 5.163 -9.80% -6.67%
Republic Cement Corp. RCM Industrial P6.30 36,690 19.69% 4.928 -3.37% 100.00%
Asian Terminals, Inc. ATI Transport P7.46 14,920 17.56% 4.894 3.61% 86.50%
Phil. Seven Corp. SEVN Consumer P16.60 5,004 14.92% 5.224 -7.78% 142.08%
Globe Telecom Inc. GLO Telecom P780.50 10,3298 13.93% 4.665 -13.71% -16.52%
Leisure & Resorts World LR Hotel & Leisure P7.98 6,782 12.66% 5.418 262.73% 486.76%
Pepsi-Cola Products PIP Consumer P2.23 8,237 10.31% 4.816 -16.48% -3.88%
Universal Robina Corp. URC Consumer P33.00 68,033 8.07% 5.717 -26.67% 94.12%
ABS-CBN Corp. ABS Media P45.00 34,417 7.52% 4.971 -19.64% 63.64%
The Philodrill Corp. “A” OV Mining P0.015 2,878 6.44% 4.995 7.14% 7.14%
Alsons Consolidated ACR Industrial P1.37 8,619 5.43% 5.771 -3.52% 31.73%
Source of Data: Bloomberg, Technistock

Overbought (Least Preferred) - Joel Greenblatt: Low ROIC and High EV/EBITDA Relative Performance
Company Ticker Industry Group Price 26-Jan-11 Mcap (Pmln) ROIC EV/EBITDA 3m 12m
Sta. Lucia SLI Property P1.37 14,791 0.04 19.495 -33.50 73.42%
Transpacific TBGI Info. Tech P3.73 828 0.14 46.073 -1.32 8.12%
ISM Communications ISM Info. Tech P3.60 6,898 0.51 14.880 -9.77 -40.00%
Alliance Global Group AGI Holding P11.62 11,2943 1.42 24.217 5.44 152.61%
Ayala Corporation AC Holding P346.80 168,399 2.00 19.690 -16.43 22.76%
Araneta Properties, Inc. ARA Property P0.35 546 2.04 12.027 0.00 -2.78%
Anglo-Phil. Holdings APO Holding P1.88 2,190 3.07 41.111 -21.67 51.61%
Filinvest Dev’t Corp. FDC Holding P4.27 32,049 4.72 16.627 -17.09 113.50%

Source of Data: Bloomberg, Technistock

The Market Call - January 2011


Special Feature

19

II. “Intelligent Investor” Screen


Methodology:

• Inspired by investing guru Benjamin Graham’s “The Intelligent Investor”


• This screen looks at the company’s size, record of earnings & dividends, and valuations
• For oversold and most preferred stocks, the criteria are as follows:
1. Latest FY Sales is greater than P4.5 B
2. Earnings per share is greater than zero for each year in the last 5 years*
3. Positive EPS growth over the last 5 years*
4. Dividend per share (DPS) is greater than zero each year in the last 5 years*
5. Price divided by average EPS in the last 3 years is less than 15x
6. P/E times P/BV is less than 22.5**
• For overbought and least preferred stocks, the criteria are as follows:
1. Market cap is at least P5 B
2. At least 1 negative EPS in the last 5 years*
3. Negative EPS growth over 5 years*
4. Price divided by average EPS in the last 3 years has 20% premium to the market multiple
- market PE as of January 26, 2011 is 12.79x
5. P/E times P/BV has 20% premium to the market multiple**
- market PE x P/BV as of January 26, 2011 is 29.64x

Oversold (Most Preferred) - Intelligent Investor (Benjamin Graham Inspired) Screen Relative Performance
Company Ticker Sector Price Jan-26-11 Mcap (Pmln) EPS Growth (5-yr) PE TTM PE x PB 3m 12m
Original Screen
Robinson Land Corp. RLC Property P13.72 37,445 260.00 10.644 15.029 20.23% 14.33%
Modified Screen
China Banking Corp. CHIB Banking P427.00 458,200 17.79 9.857 13.180 -4.47% 33.25%
Megaworld Corp. MEG Property P2.18 55,890 11.53 11.237 11.330 -14.51% 70.31%
Manila Water Co. MWC Utilities P18.20 36,538 57.14 9.795 19.293 -4.41% 19.34%
Phil. Savings Bank PSB Banking P64.00 15,376 87.94 5.391 7.955 23.08% 14.28%
Security Bank Corp. SECB Banking P85.80 35,918 70.69 8.378 14.461 0.94% 61.98%
Union Bank of the Phil. UBP Banking P58.40 37,459 33.99 8.619 9.861 -4.26% 51.69%
Source of Data: Bloomberg, Technistock

Oversold (Least Preferred) - Reverse Intelligent Investor (Benjamin Graham Inspired) Screen Relative Performance
Company Ticker Sector Price Jan-26-11 Mcap (Pmln) EPS Growth (5-yr) PE TTM PE x PB 3m 12m
Modified Screen
Manila Electric Co. MER Industrial P272.00 306,618 -11.75 35.412 183.355 20.89% 60.95%
Petron Corporation PCOR Mining & Oil P14.78 138,564 -15.63 34.550 116.092 118.96% 189.80%

Source of Data: Bloomberg, Technistock

* Note that the original Intelligent Investor screen was intended for 10 years worth of data. We created a “modified” screen since only one stock passed the Intelligent Investor Screen
using 10 years worth of data: RLC.
** The rationale for multiplying the P/E ratio by the price-to-book ratio is that Graham felt that a low P/E ratio could justify a higher price-to-book ratio. Thus he recommended the said
multiple and let the value not exceed 22.5, which is the product of a P/E ratio of 15 and a P/BV ratio of 1.5. For screening for overbought issues, we filter out stocks with a 20% premium to
the market multiple to signify if it is overvalued relative to the market.

The Market Call - January 2011


Recent Economic Indicators
20
NATIONAL INCOME ACCOUNTS, CONSTANT PRICES (in P millions)
2008 2009 2nd Quarter 2010 3rd Quarter 2010
Growth Growth Quarterly Quarterly Annual
Levels Levels Levels Annual G.R. Levels
Rate Rate G.R. G.R. G.R.
PRODUCTION
Agri, Fishery and Forestry 259,406 3.2% 259,573 0.1% 57,234 -10.5% -3.2% 57,390 0.3% -2.5%
Industry Sector 465,107 5.0% 455,784 -2.0% 136,931 16.6% 16.1% 121,928 -11.0% 9.2%
Service Sector 695,459 3.3% 716,621 3.2% 190,592 6.2% 6.7% 187,301 -1.7% 7.7%

EXPENDITURE
Personal Consumption 1,107,569 4.7% 1,149,828 3.8% 300,123 10.8% 4.6% 288,589 -3.8% 4.2%
Government Consumption 93,746 3.2% 101,753 8.5% 30,451 5.5% 5.8% 23,813 -21.8% -6.1%
Capital Formation 256,244 1.7% 230,906 -9.9% 72,027 5.4% 10.8% 61,668 -14.4% 8.9%
Exports 663,324 -1.9% 569,294 -14.2% 196,133 29.3% 29.1% 222,933 13.7% 29.9%
Imports 643,572 2.4% 606,283 -5.8% 181,363 28.5% 20.3% 196,785 8.5% 18.2%

GDP 1,418,952 3.8% 1,431,978 0.9% 384,859 6.8% 8.2% 366,816 -4.7% 6.5%
NFIA 1,689,846 30.8% 202,704 20.1% 59,613 11.2% 3.9% 65,712 10.2% 13.7%
GNP 1,587,798 6.2% 1,634,682 3.0% 444,460 7.4% 7.6% 432,389 -2.7% 7.5%
Source: National Statistical Coordination Board

NATIONAL GOVERNMENT CASH OPERATIONS (in P millions)

2008 2009 Oct-10 Nov-10


Monthly Monthly
Levels Growth Rate Levels Growth Rate Levels Annual G.R Levels Annual G.R
G.R. G.R.
Revenues 1,134,642 15.9% 1,202,905 6.0% 98,503 7.2% 15.1% 111,535 13.2% 15.8%
Tax 932,004 8.5% 1,049,179 12.6% 87,101 5.9% 17.1% 103,357 18.7% 17.6%
BIR 711,591 9.2% 778,571 9.4% 63,565 4.3% 15.7% 82,430 29.7% 17.8%
BoC 210,524 6.2% 260,248 23.6% 22,577 11.6% 21.7% 19,969 -11.6% 14.1%
Others 9,889 8.9% 10,360 4.8% 959 -6.8% 6.4% 958 -0.1% 128.6%
Non-Tax 202,488 69.7% 153,601 -24.1% 11,400 17.8% 1.7% 8,178 -28.3% -2.7%

Expenditures 1,144,064 9.9% 1,271,022 11.1% 109,017 -11.8% -4.5% 111,053 1.9% 8.1%
Allotment to LGUs 193,712 10.9% 222,995 15.1% 22,297 -0.2% 1.5% 22,443 0.7% 2.5%
Interest Payments 266,833 -14.0% 272,218 2.0% 13,985 -56.1% -1.0% 16,441 17.6% 53.2%
Others 683,519 22.9% 775,809 13.5% 72,735 4.8% -6.8% 72,169 -0.8% 2.9%

Overall Surplus (or Deficit) -62,198 -57.6% -9,422 -84.9% -10,514 -66.8% -63.2% 482 -104.6% -107.5%
Source: Bureau of the Treasury (BTr)

POWER SALES AND PRODUCTION INDICATORS


Manila Electric Company Sales (in gigawatt-hours)
2008 2009 Dec-10
Annual
Annual Levels Growth Rate Annual Levels Growth Rate Levels YTD
G. R.
TOTAL 26,808 2.3% 27,271 1.7% 2,475 3.0% 9.9%
Residential 8,623 -0.3% 8,901 3.2% 753 2.8% 7.1%
Commercial 10,482 4.6% 10,796 3.0% 1,007 3.3% 8.2%
Industrial 7,563 2.1% 7,439 -1.6% 704 2.1% 15.8%
Source: MERALCO

The Market Call - January 2011


21
BALANCE OF PAYMENTS (in US millions)
2008 2009 2nd Quarter 2010 3rd Quarter 2010
Annual Annual
Levels Growth Rate Levels Growth Rate Levels Levels
G. R. G. R.
I. CURRENT ACCOUNT 3,633 49.0% 8,552 135.4% 12193 34.3% 14435 41.3%
Balance of Trade -11,725 -90.9% -7,339 37.4% 14639 26.0% 15931 30.1%
Balance of Goods -12,885 -53.6% -8,878 31.1% 430 35.6% 88 22.2%
Exports of Goods 48,253 -2.5% 37,510 -22.3% 3105 23.3% 2844 26.3%
Import of Goods 61,138 -53.6% 46,388 -24.1% 2675 21.5% 2756 26.4%
Balance of Services 1,160 -48.4% 1,539 32.7% 4327 5.4% 4036 2.7%
Exports of Services 9,717 -0.5% 10,101 4.0%
Import of Services 8,557 13.8% 8,562 0.1% -203 79.5% 1213 40.4%
Current Transfers & Others 15,247 7.7% 15,960 4.7% 30 30.4% 32 10.3%
-233 77.0% 1181 41.4%
II. CAPITAL AND FINANCIAL AC-
-1,802 -151.1% -1,961 -8.8% 115 -86.7% 311 60.3%
COUNT
Capital Account 53 120.8% 104 96.2% -1116 -685.9% -28 -153.8%
Financial Account -1,855 -153.0% -2,065 -11.3% -35 -212.9% -118 -1172.7%
Direct Investments 1,285 307.3% 1,589 23.7% 803 145.5% 1016 75.8%
Portfolio Investments -3,798 -182.2% 1,449 138.2%
Financial Derivatives -113 60.8% 32 128.3% -327 54.9% -617 -2.3%
Other Investments 771 463.7% -5,135 -766.0%
2008 314.9% 3256 48.9%
III. NET UNCLASSIFIED ITEMS -1,742 -6.5% -1,296 25.6% 0 0.0% 0 0.0%
-12 97.6% 11 102.8%
OVERALL BOP POSITION 89 -99.0% 5,295 5849.4%
Use of Fund Credits 0 0
Short-Term 1,508 21642.9% -1,510 -200.1% 595 168.4% 2199 401.6%
Memo Items 2822 48.1% 3437 -3.8%
Change in Commercial Banks -1.2 65.7% -2 25.9%
Net Foreign Assets 2,852 378.2% -3,650 -228.0% -1106 28.1% 593 168.2%
Basic Balance 3,391 -61.7% 9,921 192.6% 2252 1.2% 2871 50.6%
Net Unclassified Items as percent-
-1.6 -5.3% -1.5 6.3% -2.3 -131.1% -1.4 60.0%
age of Total Trade

Source: Bangko Sentral ng Pilipinas (BSP)

MONEY SUPPLY (in P millions)

2008 2009 Nov-10


Average Levels Growth Rate Average Levels Growth Rate Levels Annual G.R.
RESERVE MONEY 838,517 13.3% 912,132 8.8% 1,022,240 5.23%

Sources:
Net Foreign Asset of the BSP 1,602,362 24.5% 2,100,977 17.7% 2,651,185 29.14%
Net Domestic Asset of the BSP -763,845 -46.3% -974,382 -27.6% -1,628,945 50.62%

MONEY SUPPLY MEASURES AND COMPONENTS


Money Supply-1 912,265 12.4% 1,087,407 19.2% 1,262,449 9.96%
Money Supply-2 3,164,345 8.0% 3,562,217 12.6% 4,061,344 7.42%

MONEY MULTIPLIER (M2/RM) 3.78 -1.0% 3.91 3.4% 3.97 2.08%


Source: Bangko Sentral ng Pilipinas (BSP)

The Market Call - January 2011


22

The Market Call - January 2011


The Market Call - Capital Markets Research

January 2011

CONTRIBUTORS

Roberto Juanchito T. Dispo Executive Vice President, FMIC


Dr. Victor A. Abola Senior Economist, UA&P
Reuben Mark A. Angeles Research Analyst, FMSBC
Johann Dale J. Diaz Research Assistant, UA&P
Rachelle V. Flores Research Assistant, UA&P
Jorenz C. Perez Research Assistant, UA&P
Augusto M. Cosio, Jr. Consultant

Views expressed in this newsletter are solely the responsibilities of the authors and do not represent any position held by the FMIC and UA&P.

FMIC and UA&P Capital Markets Research

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