Asia's worst-performing stock market this year has been its best recent performer. Stocks in the Philippines hit a nine-month high on Friday as the laggard Manila market plays catch-up.
Filipino stocks have now advanced 21.6% in just over a month. The Philippine Stock Exchange Composite Index closed at 5,898 on Oct. 16 and now stands at 7,170, a rally that has yet to show signs of flagging. Those are levels last seen in February, before a 38.4% descent.
On Thursday, the central bank in the Philippines gave the market a jolt thanks to a surprise interest rate cut, with the Philippine index rising 2.5% on Friday. That cut brings interest rates to 2.0%, their lowest in history. Indonesia's central bank also announced an interest rate cut that economists had not foreseen.
There hasn't been one specific driver behind the Manila rally. Nomura notes that third-quarter earnings were encouraging, while the gradual easing of lockdown measures has buoyed consumer and corporate sentiment. The result of the U.S. presidential election, with Joe Biden set to become the 46th president, is also seen as a plus for Asia, particularly on trade. Last, the prospect of Covid-19 vaccines has encouraged investors to move into previously off-limits cyclical stocks, which have performed poorly.
The Philippines is facing one of the worst outbreaks of Covid-19 in Asia. It has reported 415,067 positive cases, according to Johns Hopkins, and has registered 8,025 deaths. That led to a stringent lockdown in the worst-affected parts of the country in March, followed by stop-start restrictions ever since.
The local euphemism for a lockdown is a "community quarantine," announced for metro Manila in mid-March, then extended to much of the country. Those started to lift in May, but metro Manila and some other big cities are still in some form of lockdown until the end of November.
Even after rising by one-fifth, the Manila market is still down 8.9% year to date. Southeast Asian stocks in general have been ravaged by the impacts of the coronavirus and have yet to recover because the region is still in the throes of its outbreak.
After the rally in the Philippines, the equity markets in Singapore (down 12.9%), Thailand (down 12.3%) and Indonesia (down 11.6%) are the only Asian markets showing a worse performance in Asia for 2020.
But those equity markets have all turned positive in recent days, gaining roughly 2% each for the week, with nascent optimism that the outbreak is being brought under control.
Conglomerates, property developers and financials dominate the Philippines stock index. The economy is run by a cabal of companies with subsidiaries in many different sectors. Skeptics joke that 50 families control the nation's business fate, and its wealth. It's not much of an exaggeration.
There's a risk of a pullback in Manila, although that has yet to manifest itself. Nomura notes that at 18x earnings for 2021, the Philippines Composite is now trading above its 17x average posted since the Global Financial Crisis. That's partly because earnings forecasts are currently low, though.
"While loose liquidity conditions, benign interest rates and lower cost of capital could be supportive of higher P/E multiples for equities for the interim, we caution that rich stock valuations are prone to pullback risks in the event of any negative news flow," the Nomura country team wrote in a note to clients.
Investors should watch to see how consumer confidence fares as future guidance to gains. If discretionary consumer spending stays strong and foot traffic in malls rises, the recovery is likely to have legs. Increased capital spending by big companies would also indicate sustained confidence.
One oddity of the Philippines economy is that the country gets almost 10% of its GDP from remittances. Those payments, sent back home by overseas foreign workers (OFWs) such as seamen, construction workers and domestic helpers abroad as well as a strong contingent of foreign nurses and doctors, have been resilient, down only 1.4% year over year in September, the latest figures available.
The jobless rate, 10.0% at last count, is still high in the Philippines. The economy is also still in decline, with GDP dropping 11.5% year over year in the third quarter. That was better than the 16.9% decline of the second quarter, but worse than the 9.6% contraction predicted by economists.
In Asia, only India (with a rampant 9.0 million Covid-19 cases), Indonesia (483,518) and Bangladesh (441,159) have been hit harder by the coronavirus. But on a per-capita basis, the outbreak in the Philippines throws up numbers akin to many tiny island nations such as the Cayman Islands, Bermuda and Jamaica. Deaths are far below many Western nations with better-equipped health care systems.
The archipelago has not been helped by hard-hitting storms sweeping through the country. Typhoons are an ever-present threat at this time of year, but the storms are becoming fiercer and more frequent, with climate change exacerbated by rapid development and deforestation, leading to flooding and landslides. Back-to-back typhoons have hit in the last two weeks.
Anglo-Swedish drug company AstraZeneca (AZN) has applied to run clinical trials of its coronavirus vaccine candidate in the Philippines, the Manila government said on Friday. Manila is trying to secure 10 million doses of that potential vaccine, part of a plan to buy 50 million doses and ultimately inoculate 50% to 60% of the national population of 109 million.
The Chinese company Sinovac Biotech has passed pre-screening in the Philippines and is close to starting clinical trials of its own.