During our last briefing, we said that

We remain positive on the markets long term view

However, it could take a while for the market to
resume its uptrend due to numerous challenges in
the short term

Unfortunately, CHALLENGES remain

Earnings performance continues to disappoint

Actual earnings vs. estimates
Period

Above

Inline

Below

Median
'15E EPS
growth

1Q

19.0%

41.4%

39.7%

17.1%

2Q

23.2%

37.5%

39.3%

8.8%

3Q

23.2%

42.9%

33.9%

7.5%

Source: COL Estimates

2000

Source: Bloomberg

4
45

2015

2014

2013

2012

6.8%

2011

2010

10

2009

12

2008

14

2007

16

2006

GDP growth

2005

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

China continues to weaken

Manufacturing PMI

65

60

55

50

49.7

40

35

2016
Four potential
rate hikes of
25bps each

DECEMBER 2015
25 bps rate hike
DECEMBER 2015
Deposit rate cut 10
bps, bond purchase
extended
6 mos.

1-year lending & deposit rate cut 5X by

125 bps 125 bps
RRR cut by a total of 200 bps to 17.5%

U.S. Fed maintains its divergent monetary policy

Leading to a strong USD & falling commodity prices

US dollar

Commodity prices (CRB Index)

600

105

+35.7%

100
95

550
500

90
450
85
400

80

70
2010

-35.0%

350

75

2011

2012

Source: Bloomberg

2013

2014

2015

300
2010

2011

2012

2013

2014

2015

Commodity dependency (net exports, % of GDP)

Greenland

USA

Russia

Canada
Europe

USA
Africa

Kazakhstan
Middle
East

China
India

Philippines

S America
Australia
NZ

Hurting several developing economies

Why commodity prices matter (to developing

economies)
+57%

71%

Value of
commodity
exports (09-10
to 12-13)

% of developing
countries that derive
>60% of export from
commodities

Source: UNCTAD, Bloomberg

85%

-35%

Average drop in
commodity
prices since 11

% of least developed
countries that derive
>60% of exports from
commodities

-74%

Drop in oil prices

since 11

Countries with high commodity dependence &

current account deficits are most vulnerable
Measures of vulnerability
Developing
Market
Brazil
Russia
India
China
Mexico
South Africa
Turkey
Indonesia
Malaysia
Philippines
Thailand

Commodity Net Export*

(% GDP)
3.8%
18.0%
-7.9%
-7.0%
1.9%
1.5%
-3.5%
5.7%
7.0%
-4.8%
-6.0%

*2012-13
**2014
Source: UNCTAD, IMF (for Russia only), COL estimates

CA/GDP**
-4.2%
3.1%
-1.4%
2.1%
-2.1%
-5.4%
-5.7%
-3.0%
7.1%
4.4%
3.5%

Although more resilient, Philippines is showing signs

of vulnerability
OFW remittances growth
Deceleration of OFW
remittances growth can
not be solely explained by
weaker peso

Month
January
February
March
April
May
June
July
August
September
October
November
December
Peso Depreciation
Source: BSP

2009
0.1%
4.9%
3.1%
2.2%
3.7%
3.3%
9.3%
2.8%
8.6%
6.7%
11.3%
11.4%
15.0%

2015
0.5%
4.2%
11.3%
5.1%
5.8%
6.1%
0.5%
-0.6%
4.3%
0.2%
4.6%

Major threat from significant exposure to

Middle East
2.4 Mil

61%

OFWs deployed
in 14
(1.9 Mil land
based)

% of deployed land
based OFWs going to
the Middle East

23%

10%
CA/GDP of Saudi
Arabia (14)

Share of OFW
remittances from the
Middle East

Source: POEA, BSP, UNCTAD

Saudi Arabia
abandons its
currency peg

24%

Commodity net
export of Saudi
Arabia (%GDP, 13)

Peso is weakening . . .
Peso exchange rate
48

47.78

47
46
45
44
43
42
41
40

40.581
2011

Source: Bloomberg

2012

2013

2014

2015

Source: Bloomberg, BSP

-5.0

6.60

Jan-16

Dec-15

Nov-15

Oct-15

6.20

Sep-15

Aug-15

Jul-15

Jun-15

May-15

Apr-15

Mar-15

0.5
1.0
0.7
1.3
1.1
0.2

2.4
1.5
1.9
1.7

7.4

20.0

Feb-15

3Q15

1Q15

3Q14

1Q14

3Q13

1Q13

4.7

10.0

14.5

BoP/GDP (%)

Jan-15

-7.0

-10.0
3Q12

1Q12

3.3
0.7
2.2
0.1

0.0
3Q11

7.2

15.0

1Q11

7.3

10.0

3Q10

1Q10

4.6

5.4
4.1
2.8
4.3

1.2

5.0

3Q09

1Q09

Brought about by internal & external factors

Chinese yuan

6.70

6.58

6.50

6.40

6.30

6.21

6.10

6.00

Interest rates rising

Philippines 10-year bond rate
Factors pushing up rates
Anticipation of Fed rate hike
Weaker peso
Uncertainty on how the
interest rate corridor will be
implemented

5.00

4.42%

4.50

4.00

3.50

3.00

2.50
2013

2014

Source: Bloomberg

2015

2016

Weak peso, rising rates not good for stock market

10-year bond rates

Peso vs PSEi
9000

54

8000

52

7000

50

6000

48

5000

12

10

46

Source: Bloomberg

2016

2015

2014

2013

2012

2011

2
2010

2016

2015

2014

2013

2012

Php:US$

2009

PSEi

2011

2010

2009

40
2008

1000
2007

42

2006

2000

2008

3000

2007

44

2006

4000

Elections also hurting sentiment

34%

26%

22%

Source: Pulse Asia Nov 2015 presidential candidate preference survey results

11%

The major correction is now threatening to become

a bear market
PSEi & other ASEAN markets
110

PSEi now down 23% from

the peak
Abundance of challenges
making it difficult to fight
contagion

105
100
95
90
85
80
75
70
2015

2015

2015

Philippines

2015

2015

Indonesia

Source: Bloomberg

2015

2015

2015

Thailand

2015

2016

Malaysia

An opportunity to participate in the Philippines

attractive LT fundamentals at bargain prices
Only a cyclical bear in a secular bull
Strength of BPO sector to help offset weakness of OFW
remittances
Weaker peso is good for the economy
Consumer sector has been resilient regardless of the president
Magnitude of rate hikes not expected to be significant
Listed companies remain fundamentally strong
Markets valuation starting to look attractive

Strength of the BPO sector to help offset weakness

of OFW remittances
OFW remittances & BPO revenues
60,000

2013

OFW Remittances

Source: BSP, IBPAP, COL Estimates

25,000

18,900

28,900
24,768

2012

24,768

2011

24,768

2010

24,348

15,305

13,450

22,984

21,391

10,000

20,117

20,000

10,058

30,000

12,074

40,000

21,200

50,000

18,763

Combined OFW
remittances & BPO
revenues can still grow by
8.3% in 2016E and 7.8% in
2017E

2014 2015E 2016E 2017E

BPO Revs

Weak peso is good for the economy

OFW remittances (US$ & Php)
Boost the value of OFW
remittances

+185%

Equivalent to 11.8% of
consumer spending
OFW remittances increased
by 185% in dollar terms but
only 126% in peso terms the
last 10 years

+126%

Make exports and the BPO

sector more competitive
OFW Remittances (US$)
Source: BSP, COL Estimates

OFW Remittances (Php)

Consumer spending has been resilient

regardless of the president
Consumer spending growth under different administrations

Cory Aquino
Ave:4.2%
1986

1988

1990

Ramos
Ave:3.6%
1992

1994

1996

1998

2000

PNoy
Ave:5.3%

Arroyo
Ave:4.3%

Estrada
Ave:4.5%
2002

2004

2006

2008

2010

2012

2014

Thanks to several favorable LT factors

Magnitude of rate hikes not expected to be

significant
ISM manufacturing PMI (U.S.)
60
55
50

48.2

45
40
35
30

2008

2009

Source: Bloomberg

2010

2011

2012

2013

2014

2015

Magnitude of rate hikes not expected to be

significant
Banks loans to deposit ratio

Government debt/GDP
65

74

60

72
70
68
66
64
62
60
Source: Bloomberg

68.1

55
50
45
40

45.4

Listed companies remain fundamentally strong

Sensitivity to higher rates & weak peso

Most leveraged
companies have defensive
businesses
Minimal unhedged US
dollar debt exposure

Net D/E 0.9

Company Net D/E
CEB
BLOOM
MCP
EDC
FGEN
TEL
GLO

1.3
1.0
1.0
1.1
1.0
1.1
0.9

Source: COL estimates

Unhedged
US$ Debt
(US$Mil)
700
262
-

% of total
debt
100.0%
23.4%
-

Valuations starting to look attractive

Valuation of regional markets
At 6,259, PSEi trading at
15.6X 2016E P/E, below the
5-year historical average of
16.5X P/E
PSEi no longer trading at a
premium relative to other
ASEAN markets despite its
strong LT fundamentals

Source: Bloomberg, COL estimates

Conundrum of investing during a bear market

Be fearful when others are
greedy and greedy when
others are fearful
- Warren Buffett

The market can stay

irrational longer than you
can stay solvent
- John Maynard Keynes

Conundrum of investing during a bear market

Opportunity

Risks
Steep decline

Significant gains

Long duration
Nobody knows the
bottom

Objective: Employ a strategy to capitalize on the

OPPORTUNITY but manage the RISKS

Recommended strategy
1. Invest only LT money Bear markets take long to finish.
2. Dont use margin Using margin exposes you to the risk of
a margin call, which in turn forces you to sell at a low price.
3. Spread out your buying Nobody knows when or where
the bottom will be. Deploy your capital using peso cost
averaging over 18 months to improve your average cost.
4. Set conservative buying prices Remember its a buyers
market. Theres no need to be aggressive.

Anatomy of a bear market

Bear Markets

Global
Historical
Average*

Shortest &
Shallowest**

Longest &
Deepest**

Peak to trough

55.9%

22.5%

84.8%

40 months

5 months

153 months

Duration

Sources: *This time its different by Reinhart & Rogoff

**Greenbakd.com

Anatomy of a bear market

Bear Markets

Global
Historical
Average

Asian
Financial
Crisis

Global
Financial
Crisis

Today

Peak to trough

55.9%

71.6%

56.8%

22.6%

NA

2/97-10/01

10/07- 10/08

4/15 to ?

40 months

56 months

12 months

9 months

Date
Duration

Source: This time its different by Reinhart & Rogoff, COL estimates

Recommended strategy
5. Be defensive - We recommend buying a basket of more
defensive companies that have strong balance sheets. You
can also choose to buy an index fund which is
automatically diversified and less volatile, or you can
combine an index fund with a few stock picks.

Stock picks
Power Sector

FGEN (Php18.24, FV: Php32.70)

Engaged in the defensive

business of power generation
93% of revenues derived from
long term contract
agreements
Although it has US$394 Mil
worth of debts, its revenues
are in dollars providing it with
a natural hedge
Profits are forecast to grow by
22% this year
Trading at only 10.4X 16P/E,
while providing a dividend
yield of 2.9%

Stock picks
Property Sector

ALI (Php27.95, FV: Php41.67)

One of the largest property

companies in the country with
a diversified source of
revenues and project locations
Leasing businesses account for
35% of EBIT
Highly manageable net D/E of
0.84X as of 9M15, while 85%
of borrowings have fixed rates
Already trading at 33.6%
discount to NAV, wider than its
historical average discount of
25%

Stock picks
Property Sector
One of the largest property
companies in the country
Due to significant expansion,
leasing businesses now
account for 43% of EBIT

MEG (Php3.17, FV: Php5.58)

Very conservative net D/E of

0.07X
Now trading at 57.5% discount
to NAV, already close to 1
STDV below its historical
average discount of 59.2%,
and only 9.1X 16E P/E

Stock picks
Property Sector
Most defensive property
company in the Philippines
deriving 78.6% of EBT from rental
income, predominantly from
malls which is the most resilient
Net D/E is only 0.47X
SMPH (Php19.18, FV: Php21.70)

Buy below Php18.90 which is its

based on its historical average P/E
of 23.2X.

Stock picks
Property Sector

RLC (Php23.05, FV: Php29.60)

Also a highly defensive

property company in the
Philippines deriving 77% of
EBIT from rental income
Net D/E is only 0.38X
Already trading at 33.8%
discount to its NAV

Stock picks
Consumer Sector

DNL (Php7.10, FV: Php8.30)

A defensive company as most

of its products are sold to
manufacturers of nondiscretionary consumer goods
Focused on specialized
products which minimizes
competition and improves its
pricing power
Net D/E is only 0.24X, 28X
interest cover
Currently trading at 18.7X 16E
P/E, below the consumer
sector average of 23.5X

Stock picks
Consumer Sector

CNPF (Php15.12, FV: Php21.50)

Main businesses (fish and meat)

which account for 70% of
revenues are highly defensive and
where it is the market leader
EPS to increase by a CAGR of
25.2% during the next two years
largely due to the acquisition of
the coconut business
Net D/E is only 0.05X, 45X interest
cover
Currently trading at only 12.7X
16E P/E, well below the consumer
sector average of 23.5X, despite
its above average growth outlook

Summary of stock picks

Stock picks
Sector

Stock

Price

FV

Power

FGEN
SMPH
ALI
MEG
RLC
DNL
CNPF**

18.24
19.18
27.95
3.17
23.05
7.10
15.12

32.70
21.70
41.67
5.58
29.60
8.30
21.50

Properties*

Consumer

Buy Below High Conviction

Price
Buy Price

*Limit to only a maximum of 30% of portfolio

**Limit exposure to 5% of portfolio due to illiquid nature of stock

28.40
18.90
36.20
4.70
25.70
7.20
17.20

16.50
12.22
24.00
3.05
19.50
6.60
14.28

Summary of stock picks

Index Fund
Ticker
PSEi
Equity Fund
The Philequity
PSE Index Fund

XPEIF

Current
Level
6,135.38
4.091

Buy Below High Conviction

Buy Price
Price
6,400.00
5,600.00
4.262

3.729

Recommended strategy
5. Be defensive - We recommend buying a basket of more
defensive companies that have strong balance sheets. You
can also choose to buy an index fund which is
automatically diversified and less volatile, or you can
combine an index fund with a few stock picks.
6. Be mentally prepared to see losses in the short term This
is normal while the market is trending lower.

Rewards for staying invested even during difficult

times
S&P 500 20 year average annual return (1994-2013)
12.00%
10.00%

9.20%

8.00%

5.50%

6.00%
4.00%

0.90%

2.00%
0.00%
-2.00%
-4.00%

Stayed the
course

-6.00%

Missed best
10 days

Missed best
30 days

Missed best
60 days

Missed best
90 days

-4.40%

-8.00%
-10.00%
Source: Davis Advisors

-8.60%

44

45