ANALYSIS: Philippine stocks are cheap, but why aren’t investors buying?

Philippine stocks are trading at historically low valuations, but weak earnings visibility, a softer peso and high bond yields are keeping investors cautious.

There is a strange thing happening in the Philippine stock market. Stocks are cheap, at least by historical standards, yet investors aren’t exactly rushing to buy them.

At roughly 8 times price-to-earnings, the broader Philippine market is trading at what Manulife Investments Philippines describes as historically depressed valuation levels. Yet the market continues to contend with foreign outflows, a weak peso, elevated bond yields and uncertainty over the domestic economy.

So if Philippine stocks are already cheap, what exactly are investors waiting for?

Perhaps the answer is that investors aren’t simply looking at how much a stock costs. They are looking at whether there is a good reason to believe that price will eventually go higher.

As Elle Jamil, the investment firm’s head of equities, put it, “a significant portion of the pressure from higher bond yields and peso weakness is already reflected in valuations.”

That sounds encouraging at first. If much of the bad news is already priced in, perhaps the market has limited room to fall.

But cheap valuations alone do not automatically bring buyers back.

Jamil said a sustained re-rating would likely require a clear improvement in domestic macroeconomic conditions, better earnings visibility, greater peso stability and a more compelling Philippine equity-market narrative compared with regional peers.

In other words, being cheap is one thing. Becoming attractive is another.

This is particularly important when investors can earn relatively attractive returns from fixed-income instruments without taking on the same level of risk associated with equities. Higher bond yields raise the hurdle for stocks, while a weaker peso also reduces the dollar returns foreign investors ultimately take home.

That leaves the Philippine market in an awkward position. Valuations may already reflect plenty of bad news, but investors still want evidence that conditions are actually improving before committing more capital.

For Philippine companies, that means stable earnings may no longer be enough to get investors excited. Balance sheets, cash flows, dividends and capital allocation are becoming increasingly important as the era of cheap money fades.

For the market to re-rate, investors need something to believe in beyond a low price-to-earnings ratio.

Until then, Philippine stocks may stay cheap because investors are still waiting for signs that the market is worth betting on.

A low price can get their attention, but it takes stronger earnings, a steadier peso and better economic conditions to get them to buy.

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