Duterte outbursts taking toll as Philippine stock losses mount

Philippines President Rodrigo Duterte listening during the ASEAN-China Summit in Vientiane, Laos, on Sept 7, 2016.
Philippines President Rodrigo Duterte listening during the ASEAN-China Summit in Vientiane, Laos, on Sept 7, 2016. PHOTO: REUTERS

MANILA (BLOOMBERG) - Losses in Philippine stocks are accelerating as foreigners keep pulling money from Asia's most expensive market amid speculation the outbursts of President Rodrigo Duterte are hurting investor sentiment.

The Philippine Stock Exchange Index dropped for a third day, losing 1.3 per cent to 7,620.64 as of 2.36pm in Manila on Wednesday (Sept 7), on course for the biggest decline in five weeks. The gauge has fallen 5.9 per cent from a 15-month high on July 21, paring its gain this year to 9.6 per cent.

Foreign funds have pulled US$276 million (S$372 million) from local shares in a 10-day run of of outflows through Tuesday. The index is down 2.3 per cent this quarter, the only decliner among major Asian markets.

Duterte's threat to swear at US President Barack Obama if he criticised an anti-drug campaign that's left around 2,400 dead, and the subsequent cancellation of a meeting between the leaders, "didn't sit well" with overseas investors, said Rafael Palma Gil, a portfolio manager at Rizal Commercial Banking Group in Manila.

Duterte's behaviour is taking the shine off a market that had been an investor favorite due to one of the highest economic growth rates in Asia.

"The latest incident raises concern that President Duterte's unpredictable behaviour in politics will be disruptive and could eventually spill into economics and business," said Jonathan Ravelas, chief market strategist at BDO Unibank Inc, the Philippines' biggest lender.

It's "further weakened a market that's already been made vulnerable by uncertainty over US interest rates, elevated valuations and overseas fund withdrawals," he said.

The Philippine index is trading at 18.3 times 12-month estimated earnings. While that's down from 19.6 in July, it's still the highest in Asia and at a 31 per cent premium to the MSCI Asia Pacific Index. The country's economy expanded 7 per cent last quarter from a year earlier, after 6.8 per cent growth in the first three months of 2016.

Investors may be better off holding cash in the near term as the index could test its 7,500 support level, said BDO Unibank's Ravelas. The gauge could fall as low as 7,330 in the next two months as the budget deficit is set to rise when taxes are cut and spending raised, April Lee-Tan, head of research at COL Financial Group Inc. in Manila, said Monday.

"Smart investors should take advantage of the weakness and accumulate because this is all sentiment-driven," said Rizal's Palma Gil. "Other than incendiary statements and killings related to the drug war, investors like Duterte's economic and fiscal policies or at least what has been communicated so far," he said, adding that he expected the index would go back up to 8,000.

MOODY'S STATEMENT

A deadly Sept 2 bombing in Davao City, Duterte's hometown, and the president's subsequent declaration of a "state of lawlessness" pose only a limited credit impact in the near term, Moody's Investors Service said in a statement released Wednesday.

"If recent events lead to prolonged uncertainty around security or economic policy, such a development would eventually dampen business confidence and consequently, economic outcomes," Moody's said in the statement. Duterte's "increasingly controversial law and order policies could exact an opportunity cost for reform."