HONG
KONG: The Philippines could attract more capital inflows after winning
its first-ever investment grade rating, but any boost to local bonds,
stocks or the peso currency is likely to be mild for now, investors and
analysts say.
Fitch Ratings raised the Philippines' sovereign rating by one notch to BBB,
noting that a persistent current account surplus underpinned by
remittance inflows has helped the country become a net external
creditor.
But while the upgrade is widely seen as positive for
Philippine assets, expectations for a ratings upgrade have already been
built into markets, limiting the scope for further gains.
Moreover, either Moody's or
Standard & Poor's
will likely have to upgrade their ratings on the Philippines as well to
spur major inflows from overseas investors who are only allowed to hold
investment grade assets.
The influential JPMorgan Asia credit
index (JACI) requires that for a bond to be classified as investment
grade, it should be rated investment grade by either Moody's or S&P.
JPMorgan does not take Fitch into account when categorising bonds.
“There
is no big impact at the moment since most index providers require
upgrades to investment grade from two agencies for inclusion in their
investment grade indices,” said Joep Huntjens, a fund manager for ING in
Singapore.
“There could be some technical support if another
agency upgrades Philippines, but looking at the valuation of the bonds,
much of that has been priced in already,” Huntjens said, adding that at
least one more rating agency was likely to upgrade the Philippines this
year.
“We think there is some room for spread compression in the
sovereign linked entities and banks in Philippines, less so in the
sovereign,” he added.
Philippine sovereign bond prices rose 25 to
75 cents after the Fitch move on Wednesday while stocks briefly hit a
record high. Local markets were closed yesterday for the long Easter
holiday and trading will not resume until Monday.
Reflecting how
strongly the upgrade expectations have been priced into markets already,
long dated Philippine sovereign bonds are trading with a yield spread
of just 92 basis points over 30-year US Treasuries, compared to 185
basis points for Indonesian bonds.
The impact on equities could
be limited as well, as some market watchers think valuations are already
stretched after the benchmark index rallied 18% in the first quarter.
“The
Philippines is overrated and overextended and overowned like Indonesia
and Thailand... there is serious potential for correction,” said David
O'Neil, chief investment office at Asean Investment Management in Hong
Kong.
At 16.9 times forward 12 months earnings, it is the
priciest market in the Asia-Pacific region. Versus its own past, the
MSCI Philippines index is trading at a 42% premium to its 10 years
forward median PE.
“All the ducks are in line. You can't expect anything to happen there now,” said Homiyar Vasania, former MD of
Morgan Stanley
Investment management and founder of River Valley Asset management. “In
Philippines, everything looks very good... The actual numbers look very
good for the last five years. But whenever they look very good,
whenever all the ducks are exactly aligned, you normally have a
problem,” Vasania added.
Judging from past episodes of credit
rating upgrades to investment grades in the past decade, the impact on
Philippine shares could prove short-lived, Michael Wan, an analyst for
Credit Suisse in Singapore, said in a research note. Reuters
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