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MANILA, Philippines - (UPDATE: 5:26 PM) Bank of America-Merrill Lynch sees the Philippine stock market and the peso outperforming all other ASEAN countries in 2012 as investors favor the country's growth trajectory, supported mainly by domestic consumption.
"Indonesia and the Philippines have very strong domestic consumption so it's a multi-year story. It's a favorite area. How long it will last - there would be probably a rotation. Previous analyses show that every time developed markets are weak, ASEAN especially - those with strong domestic consumption - will outperform," Victoria Ip, Merrill Lynch Asia Pacific chief investment strategist, said in a briefing on Friday.
This year, Merrill Lynch has seen funds flowing out of Asia, especially from North Asia, since the region is more liquid than Europe and North America. Investors are also concerned about China's slowing economy.
"But when the developed markets get relief on the macro side, and the valuation is cheap, ASEAN countries will underperform," Ip said.
Record peso gain, market high
On Tuesday, the peso hit a four-year high of P41.72 against the dollar. Analysts saw this as unusual in a period traditionally seen as an imports season, when businesses withdraw huge volumes of foreign currency to stock up on raw materials.
The BSP said the peso's strength was brought about by the interest of foreign investors in the Philippines' fiscal position and growth story, in contrast to more developed countries' debt-ridden situation.
Along with the peso, the Philippine Stock Exchange's main index hit another all-time high of 5,369.98, erasing the record level reached on Tuesday.
Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco Jr. had told reporters this week that they haven't seen any asset bubble yet. They will, however, guard the peso from speculation by tweaking rules on non-deliverable forwards and special deposit accounts, which are possible entry points for speculators.
"I think the Philippines is the one country that is very fortunate to see its currency move up," said Merrill Lynch’s Ip. "Actually if you think about other ASEAN countries like Indonesia earlier, a month or so ago, they are thinking about [instituting] measures to keep money from moving out."
"What has happened is that they have very high foreign ownership in their bond market and because there is a concern that there would be a reduction of [government] subsidies and inflation would be going up, people are selling their bonds. Market is taking out money from Asia," she added.
PH will stand out
That said, the Philippines will "stand out" since other currencies of other ASEAN countries would weaken against the US dollar, Ip said, as they stimulate their economies in the face of a slowdown in global trade. These could be achieved through interest rate cuts by their respective central banks; their hands are no longer tied since inflation pressure has eased with dropping prices. Given such actions from the likes of China, Indonesia, India and other Asian countries, currencies in the region would then weaken against the US dollar.
For the Philippines, however, Ip sees the peso firming up against the greenback, to hover around P42 from last year's P43.3, based on BSP figures.
Except for tweaking rules on NDFs and SDAs to block potential avenues for speculators, Philippine monetary authorities would not make administrative interventions that would control capital inflows because of the relatively stable macroeconomic environment, Tetangco had said.
Johannes Jooste, Merrill Lynch chief investment office director, said their euro-based clients are looking to diversify their holdings to include good quality, non-dollar assets from emerging markets such as the Philippines.
"Capital controls would send negative signals to investors. It might be a short-term fix for certain issues," he said. He added that it is not a smart move since these portfolio investments might suddenly leave the country when Europe and the US start showing signs of stability.
Policy rates seen steady
For the rest of the year, Merrill Lynch sees that the BSP will keep its policy rates steady despite the easing inflation as it hiked its gross domestic product growth from 4.4 percent to 5.6 percent. For 2013, the investment bank trimmed its forecast from 5.9 percent to 5.7 percent on weaker exports outlook and higher imports to fuel a faster economic growth.
There is enough surplus capacity in banking and properties to accomodate this stronger demand and capital expenditures by water utilities and telecommunications will be apace with GDP growth.
"The main areas we believe where dependable supply is lacking are the power and transportation sectors. Note that the strong 1Q12 GDP growth rate was achieved despite the absence of public private partnership (PPP) projects. The private sector is already addressing gaps in power, and the growth outlook may improve further if PPPs materialize, particularly in transport," Merrill Lynch said in its mid-year research note.
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