New listings and popular real estate offerings on the Philippines' capital markets build momentum

One of the oldest stock exchanges in Asia, the Philippine Stock Exchange (PSE) is delivering robust returns. Indeed, the PSE index (PSEi) ended 2017 on an all-time high – up 25.1% year-on-year (y-o-y) – and broke an intra-day record on the year’s last trading day, reaching 8640.04 points. These gains proved difficult to sustain in 2018, with the PSEi sliding throughout the year and ending in the red, mirroring turbulence in international capital markets.

Nevertheless, the 12.8% y-o-y loss in 2018 demonstrated key fundamentals about the country’s capital markets and their underlying resilience as the longerterm trend showed growth. Indeed, looking at the decade leading up to 2018 there were more years of gains than losses, with the 2009-14 period showing six consecutive years of expansion. Reinforcing the underlying trend, during the first few months of 2019 the PSEi began a slow and steady climb, up from 7466.02 points at the end of 2018 to 7859.78 points near the end of August 2019.

The volatility of the last few years shows the market’s vulnerability to global capital flows, which is a prevalent issue for emerging markets. These swings demonstrate the need to widen and deepen the market to protect against future shocks. Performance in the period ahead will thus depend upon the success of ongoing efforts by government and sector players to develop the financial sector – efforts given new impetus by the country’s development plans and the need to fund large-scale infrastructure projects.

History 

The PSE was formed in 1992 after a merger between the Makati Stock Exchange and the Manila Stock Exchange, the latter of which was established in 1927 and thus gives its descendent, the PSE, a claim of being one of Asia’s oldest exchanges. The PSE became a self-regulatory organisation in June 1998 and in 2001 it was converted from a non-profit entity to a revenue-driven corporation led by a president and board of directors. In February 2018 the trading floors unified at the new PSE headquarters in Bonifacio Global City, a rapidly growing business district in the capital. A unified trading system was introduced in November 1995, but until the relocation the PSE operated from trading platforms at both of the old exchanges. The PSE has eight indices, including the PSEi with 30 of the exchange’s largest and most active common stocks; the All Shares Index; and sector-specific indices for financials, industry, holding firms, property, mining and oil, and services.

The Securities Clearing Corporation of the Philippines, which administers the trade guarantee fund and acts as the settlement coordinator and risk manager for transactions, became a wholly owned PSE subsidiary in 2004. A daily disclosure system began operations in 2005, with a trading system, PSETradex, starting in 2010. The following year Capital Markets Integrity was spun off to become a separate independent market regulatory body and launched its new Total Market Surveillance system in 2012.

In 2013 the PSE trimmed its three-board structure to two: the Main Board, and the Small, Medium and Emerging Board. Companies with an authorised capital stock of at least P100m ($1.9m), of which 25% or more is subscribed or fully paid, are entitled to list on the Small, Medium and Emerging Board. However, few such enterprises have listed on the board, with four listing as of August 2019. It is an ongoing goal of the PSE, working in collaboration with the Securities and Exchange Commission (SEC), to encourage additional listings of small and medium-sized enterprises (SMEs).

Oversight 

The main regulator for the market is the SEC. The agency was established in 1936 and has been headed by Emilio Benito Aquino since June 2018. The SEC drafts rules, registers companies, monitors and supervises the market, and has produced a succession of five-year development plans, with the most recent covering the 2013-17 period.

The SEC falls under the Department of Finance (DoF), which itself has under its remit a number of organisations with oversight of the financial sector and capital markets. One such body is the Insurance Commission, which in February 2019 allowed insurers and reinsurers to invest in debt or equity instruments connected to the government’s Build, Build, Build (BBB) infrastructure drive that targets improvements in the country’s airports, roads, ports and railways (see Insurance chapter).

Another important player is the central bank, Bangko Sentral ng Pilipinas (BSP), which has a role in developing financial markets and ensuring they meet international best practices. In this capacity, the central bank is moving the sector towards the most recent International Financial Reporting Standards. The BSP issues guidelines for the implementation of the latest local version of the international standards, Philippine Financial Reporting Standard 13. For example, the central bank wrote new standards in marking to market for peso-denominated government securities in 2018.

The government also has an influence on the market, notably through its legislation on issues such as taxation. The government of President Rodrigo Duterte has sought to reform, simplify and harmonise the tax regime via a series of new laws, the fourth package of which targets capital income tax. Under the package, capital income tax would be set at a standard 15% and gross receipt tax on the banking system pegged at 5%. The reformed capital income tax cleared the House of Representatives in December 2018 but got stalled in the Senate in the months leading to the May 2019 mid-term elections.

Regulatory Changes 

The SEC implemented a series of regulatory changes in recent years aimed at encouraging capital market development and improving oversight. In 2018 the SEC drew up guidelines for the PSE to report on sustainability. Under the new guidelines, companies are required to release data on any significant impact their activities have in the environmental, social and governance spheres. The PSE welcomed this change and intends to implement this by the end of 2019 (see analysis).

In late 2018 the PSE amended its local small investors programme, which seeks to encourage small retail investors to buy and sell stocks. As per the amendments, any company making an initial public offering (IPO) must offer 10% to small investors, with the maximum they can invest raised from P25,000 ($465) to P100,000 ($1860) (see analysis).

The SEC has also implemented regulations regarding real estate investment trusts (REITs) and short selling. As of April 2019 the agency was conducting a series of reviews on the implementation of the REIT Act, which will allow the financial tool to be listed on the stock exchange. The legislation was passed in 2009 but implementation stalled as property developers raised complaints regarding taxation and ownership. Additionally, the SEC published guidelines for short selling in June 2018 that were later amended by the PSE in January 2019 to prohibit the move in pre-open and pre-close phases.

Regional Alignment 

In addition to providing oversight of the local markets, the SEC is working with other regulatory bodies throughout the ASEAN bloc to pursue a strategy of alignment between the capital markets of member states. One such development in this regard came in December 2018 when the SEC issued guidelines on the implementation of the ASEAN Capital Markets Forum Pass, which would allow professionals to be licensed throughout the region. The initiative falls under the ASEAN Capital Markets Professional Mobility Framework, which aims to strengthen connectivity and cooperation between the region’s capital markets.

Performance 

For the equities market, 2018 witnessed troughs compared to the highs of 2017. The PSEi fell by 15.9% in the first half of the year to 7193.68, with all sectors recording a loss. Financials were the worst performers, down 20.2%, while industry fell by 7.3%. The numbers began to recover by year’s end, with total market capitalisation at P16.2trn ($301.3bn) and average daily turnover at P7.2bn ($133.9m). The PSEi ended the year at 7466.02, down 12.8% y-o-y. Again, declines were across the board, with mining and oil falling by 28.7%, financials by 20.2%, holding firms by 14.8%, services by 10.9%, property by 8.8% and industry by 2.5%. Capital raised rose by 14% y-o-y, however, to P187.4bn ($3.5bn). The bulk of the capital raised – some P150bn ($2.8bn) – was from the first half of the year when a number of banks issued stock rights offerings (SROs). In April 2018 Metrobank raised P60bn ($1.1bn) and in May the Bank of the Philippine Islands (BPI) completed a P50bn ($930m) offering. Metrobank issued SROs to widen its distribution network, acquiring a final stake in the bank’s credit card provider, while BPI used the capital raised to finance further digitalisation and boost services tailored for SMEs and microfinance.

The 2018 bear market was not unique to the Philippines, where share prices fell even as GDP grew by 6.1% in the last quarter of 2018 and corporate earnings saw double-digit growth. International factors such as the fears of contagion from Turkey and Argentina, the US-China trade war and the US Federal Reserve rate hikes weighed down emerging markets’ equities. One domestic factor that made an impact, however, was inflation, which surged to a nine-year high of 6.4% in August 2018 and led to financial services firm Jefferies Hong Kong downgrading Philippine equities amidst criticism the central bank was not quick to bring inflation under control. According to the BSP, inflation averaged 5.2% for the year as price pressures eased in the fourth quarter.

Bouncing Back 

The rebound continued into 2019, with the index closing the first quarter at 7920.9, up 6% y-o-y. Total market capitalisation in March 2019 reached P17.2trn ($319.9bn), up 6.7% from the beginning of the year, and average daily turnover increased to P8bn ($148.8m), up 12.1% from the end of 2018. At the end of the first quarter all sectors except financials and mining and oil were in the black. The former was down 1% and the latter 3.3%, while property was up 13.4%, services 11.5%, industrials 7% and holding firms 5.4%. Net foreign buying stood at P32.6bn ($606.4m), while total capital raised was down by 40.4% to P16.9bn ($314.3m) due to 2018’s major SROs. PSE figures for January 2019 show foreigners made up some 56.1% of all market trades during the first month of the year at a value of P19.4bn ($360.8m), up significantly from the P2.5bn ($46.5m) in transactions made by foreigners in January 2018. As of March 2019 there were 267 listed companies and 131 active traders.

Similar to other indicators, the PSEi’s price-toearnings (P/E) ratio fell during 2018 before picking back up in the early months of 2019. The PSEi’s ratio dropped from 21.862 at the start of 2018 to 17.857 at the close of the year, with the lower ratio indicating perceived risk or reduced growth prospects. This figure was below the PSEi’s average of 18.9 over the last six years. The index’s P/E picked up again in 2019, rising to 19.404 by the end of March as investors sought undervalued stocks.

IPO Activity 

IPOs faced difficult market conditions in 2018, and as such several companies delayed planned offerings. In June 2018 Del Monte Philippines backed out of an IPO that planned to raise P17.6bn ($327.4m) in net proceeds. Consumer electronics giant Cal-Comp Philippines also delayed its IPO in September. Only DM Wenceslao & Associates, an integrated real estate and construction firm, issued an IPO to raise P8.2bn ($152.5m) in June. The volatility of the market dragged down the company’s stock prices, which were set at P12 ($0.22), almost 50% lower than its initial planned P22.90 ($0.43). The stock price has since hovered around P10 ($0.19).

Conditions have improved for 2019, however, with the SEC approving the P1.4bn ($26m) IPO of Allied Care Exports Medical Centre Iloilo to raise capital for the construction of a hospital in December 2018. Companies that announced plans to postpone offerings are also edging back towards the market. Cal-Comp Philippines announced in February 2019 its plans for an IPO by the third quarter. The company will sell 378.1m shares at P17 ($0.32) each, but said it may adjust the size of the IPO depending on market conditions. Food cart company Fruitas Holdings, which also backed down from an IPO in 2018, announced in January 2019 plans for a P2bn ($37.2m) IPO by the second half of 2019 to finance store expansion. AirAsia Philippines also announced in May 2019 hopes to raise more than $200m through an IPO in 2019 after delaying one previously announced in 2018. The PSE aims to potentially hold six IPOs in 2019. “Most of the investment houses and fund managers project the market in 2019 to be much higher in terms of share prices and much better, higher volume, than in 2018,” Ramon S Monzon, president and CEO of the PSE, told local press in early 2019. “If said projections come true, the market will definitely be ripe for more IPOs.”

Fixed Income 

While 2018 was a poor year for equities, bonds did remarkably well, with the Philippine Dealing and Exchange (PDEx) experiencing a banner year. The PDEx was authorised by the SEC in 2003 to operate the official secondary market for the trading of government and corporate securities and is a subsidiary of the Philippine Dealing System (PDS) Group. PDS also includes the Philippine Depository and Trust Corporation, which provides safekeeping and settlement services for the PDEx under the dual leadership of the SEC and BSP. PDS owns the Philippine Securities Settlement, which operates real-time domestic transfers in US dollars and Chinese yuan, as well as a payment-versus-payment system for interbank US dollar-peso transactions. In the long run it is likely the PDS will ultimately be acquired by the PSE, further unifying the different arms of the capital markets under the PSE umbrella.

The PDEx for fixed-income securities had P256.4bn ($4.8bn) in new debt listings in 2018, up 24% from the previous year. The positive 2018 figures followed growth in both 2017 and 2016, which had P207.4bn ($3.9bn) and P109.7bn ($2bn) in new listings, respectively. The 2018 numbers were likely due in part to interest rate hikes imposed by the BSP in the second half of 2018 and the volatility of the equities market, with major investors altering their portfolios in favour of fixed-income instruments.

Several major debt issuances have taken place or are in the pipeline for 2019, including independent power producer SME Global Power Holding’s P30bn ($558m) issue of three-year bonds in April. The subsidiary of the San Miguel Corporation has plans for a second P30bn ($558m) issuance in 2020, while another electricity distributor, Aboitiz Power, announced plans in January 2019 for a P16.8bn ($312.5m) issue in the second half of the year to help finance its expansion. Other issuances include real estate company Century Property’s P3bn ($55.8m) three-year bond, which was launched in April 2019.

Outlook 

The interest of power producers in bond issues highlights growing demand for finance from infrastructure firms – not just because of overall economic growth in the country, but also because of the BBB initiative. As such, the period ahead should see more listings on the PDEx as the public infrastructure drive gathers pace, giving investors a comparatively less volatile means of investment in the Philippines’ capital markets.

At the same time, the launch of REITs and an uptick in IPOs is expected to give the PSE a wider array of tools and more capital to strengthen the market. While the PSEi will remain vulnerable to external pressures, such as the progress of US-China trade talks, the performance of other emerging economies’ capital markets and global economic growth, falling inflation will create a more stable interest rate environment going forward – a positive sign for capital markets development.