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Value of equities in Philippine real estate as good as in Hong Kong–Merrill Lynch

Saturday, July 26, 2008 [ ]
By Likha Cuevas-Miel, Reporter

Despite the bleak scene in the local markets as the country reels from rising inflation, one of the world’s largest investment banks sees good values in Philippine equities, especially on the real-estate front.

Stephen Corry, Merrill Lynch (Asia Pacific) Ltd. head of Investment Strategy, told The Manila Times that the property sector has interested him since values now “are beginning to emerge” as similar to those of Hong Kong.

Merrill Lynch’s local head of research, Jojo Gonzales, averred, saying the industry “remains very buoyant” and values will go higher.

Both observed that the industry may be taking a hit from the rising cost of borrowing and building homes, but it is being propped up by high liquidity and offshore remittances that help fuel the property market.

“Higher interest rates will be a negative but the share prices of these real-estate companies haven’t really plummeted. [They are of] good value right now,” Corry said, adding that residence uptake has not dramatically gone down and office vacancies remain very low.

Unless there is a steep drop in property values, the industry will be able to weather the current economic crisis and “we will have 15 to 20 years ahead of us with strong underlying real estate market,” he said. It also helps that lending practices of Asian banks have improved, rather on the conservative side, which is a lesson learned from the 1997 Asian financial crisis.

Relief in sight

Besides the Philippines, Merrill Lynch has positioned itself defensively in China, Thailand and Indonesia and kept its lowest investment allocation in Asia in India, Australia and Korea.

The investment banker said the growth in the Asian region is “pretty resilient” despite volatile oil prices, the global credit crisis and fast rising inflation that threatened to cripple economies during the first half this year.

Among the biggest casualties of the spiking oil prices is the Philippines and India.

Corry said, “The good news here is our commodity strategist believes that oil will peak at $150 per barrel in the summer. We saw a spike of $146 to $147 before the sharp sell-off. We don’t think that oil would come to $200 and if it does it will be disaster for the global economy. Airlines, consumer, financials will all suffer under that scenario so we don’t think we’ll get there.” With that, the price of oil would slide down by the end of the year and would average at $107 a barrel next year.

Until then, Asian central banks have to put a lid on rising inflation. Interest rates have only begun to move up as central banks try to catch up with runaway inflation.

“Here in Asia we see significant rise going forward. Almost the universal answer of central bank governors across the region is ‘the reason why inflation is high in our country is because of higher fuel and food. Whether we raise rates will have no impact on those prices.’ Our regional economist think that is wrong,” Corry said.

He said Asia is 25 percent of global gross domestic product and is “the core driver of global inflation but they [central banks] need to realize that and we want to see inflation under control.”

Asian countries certainly would not want to see the kind of consumer prices index jump from 7 percent to 27 percent in just one year, just like what happened in Vietnam. Corry said the Philippines is in the right direction by aggressively tightening monetary policy by 50 basis points while the markets were just expecting half of that.

“The peso rallied and the sovereign debt spreads have narrowed and equity markets are higher. But what I think is the [Bangko Sentral ng Pilipinas] will get tough on inflation and we’re going to see higher interest rates up ahead and that will be negative for equities,” the Merrill Lynch executive said.


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