It is my pleasure and honor to present the 2013 Outlook of one of the women who moves and shapes the business environment, Ms. Riza Mantaring, CEO of Sun Life Philippines. Riza has successfully lead her company to be the number 1 life insurance company in the Philippines (in total premiums) as of 2011. What I admire most about Ms. Mantaring is not only her dedication to excellence in work and in life but also her zeal in promoting financial education for the Filipinos.

The 2013 Outlook of Riza Mantaring

We expect 2013 to be another strong year for the economy and the industry. While there is some risk from external factors such as the lingering European debt crisis, the continuing US fiscal issues, and a slowdown in China, we feel the Philippines will be relatively insulated as the economy is being driven by strong domestic consumption. Inflation is under control, OFW remittances continue to increase, and the expected increase in government spending, particularly for infrastructure, plus election spending will also help support growth.  And we have a long runway ahead as we have a young population with growing purchasing power – we are in the so-called “demographic sweet spot!”

For the insurance sector, with the very low market penetration and increasing affluence, we expect the strong growth of the past three years to continue. The low interest rates, however, will continue to pose a problem as they make traditional protection products difficult to price attractively. Investment-linked products have become the bread and butter of the industry, but it is important to be able to maintain traditional products as if the market turns for the worse, this could severely impact the industry as we saw in 2008-2009.

For asset management, we expect growth to accelerate given the favorable market conditions, the strong liquidity in the system, and investors searching for better returns on their investments.

RizaMantaring is the President & CEO of the Sun Life Financial group of companies in the Philippines, and a member of its various boards.She started out in Information Technology and took on various roles through her 20+ years at Sun Life before becoming CEO.

Riza is a member of the Sun Life Asia Leadership Team.  She has also participated in various international special projects and teams such as the task force for worldwide restructuring of the company, the task force for business processes, and special teams for Mergers & Acquisitions.

In 2010, on the occasion of the 100^th anniversary of the University of the Philippines College of Engineering, she was selected one of the 100 Most Outstanding Alumni of the past century. In 2011, she was named by Moneysense Magazine one of the 12 Most Influential in Personal Finance, and became a recipient of the 2011 CEO EXCEL award given by the International Association of Business Communicators.  Riza was recognized for bold and innovative programs and harnessing the power of communication to implement these programs, including the multi-awarded and pioneering “It’s Time!” financial literacy advocacy.

Riza graduated with a B.S. Electrical Engineering degree (cum laude) from the University of the Philippines, and an M.S. Computer Science from the State University of New York at Albany.  She has also attended numerous executive development programs conducted by Harvard University, The Wharton School, Duke University, Oxford University, Asian Institute of Management, and The Niagara Institute.  She is a Fellow of the Life Management Institute (with distinction).

She has been a board director of the Philippine Life Insurance Association since 2011 and is currently its Treasurer, and served as a board director of the Philippine Federation of Pre-need Companies from 2006-2008.

I am pleased to present the 2013 Outlook of my friend and comrade, Dr. Alvin P. Ang. Alvin is an established economist and have been one of the active movers of the Philippine Economic Society and the University of Santo Tomas. I often seek Alvin’s counsel especially on matters of the economy. Alvin is not only a well esteemed analysts and professor, he is also an advocate of financial education of the Filipinos.

The 2013 Outlook of Dr. Alvin P. Ang

Last year we said that 2012 is a breakout year for the Philippines.  We were not disappointed.  By the time of this writing, accolades here and there have flooded the world about the revival of the Philippine economy. 2012 indeed is a good year.  We have seen unprecedented levels of growth in the equities market and incredibly low interest rate regime hovering for most of the year.  These happened despite challenges in the global economy – the problems that continue to plague the Eurozone, the threat of the US fiscal cliff, among others. Locally, not even the negative impacts of the successive typhoons and monsoon rains have dampened the improved business climate.  The promise to clean the bureaucracy and change the way of doing things undoubtedly have reached investors as confidence have strengthened.  The passage of administration measures such as the RH Bill and the Sin Tax and the removal of the Chief Justice show the resolve to move beyond the usual.  The preliminary peace agreement in Mindanao also helped assure that peace and order issues will be settled.   We are seeing strong double digit growths in capital formation in the last two years – a pattern observable in the Philippines when confidence in the administration is high and up.  Because of these, GDP for 2012 likely hit 6.5%.  This growth is not a blip unlike 2010 or 2000 which are base effects due to a weak prior year.  It is backed up by confidence, resilience and political will.  For 2013, the economy is on a step up.  At current investment levels, growth can match 6.5% and even up to 7%.  Current growth continues to be sustained by the remittances which year by year continue to increase albeit at a slower pace.  The services sector led by the BPO and Tourism continue to make headways for growth.  Last year, construction, finance, real estate, transportation and communication proved to be the growth factors.  This year, these same sectors will benefit from the large foreign inflows of investments pulling with it local investors.  Communication will push further especially as consumers have shifted from mere texting to using mobile internet – as evidenced by the lower text volumes during the holidays.  Real estate is going to be on the overdrive – the competition for the lower to upper middleclass residential housing and condominiums catering to OFWs, will now be supported strongly by the demand for foreign locators.  Data from the BSP shows that direct foreign investments are building up at the real estate sector.  This in turn is supporting the strong construction growth.  These are signs that beyond the BPOs, foreign locators are building base.  The Japanese have finally put substantial investments here in 2012. Canon, Brothers and Bandai are among the big ones that have already established base.  Substantial investments are also seen in the wholesale and retail sectors which are bouyant when economies are in an upswing.  The low interest rate regime will remain especially as inflation continues to hover about 3%.  It also helps that the government is making good in its finances and have no need to borrow heavily. With excess cash, the much vaunted PPP projects and large infrastructure projects can easily be put online this year.   All of these will be bouyed further by the much awaited confirmation of an investment grade within the 1st half of the year!  In addition, the mid-term elections spending could help boost local demand.

Despite these good and positive expectations, there remain challenges.  First, the strong confidence in the economy is bringing in unprecedented foreign exchange inflows from all sides – direct investments, portfolio investments, remittances, touris and BPO income.  This has made the peso appreciate  faster – this could potentially erode the confidence and competitiveness we are enjoying.   The BSP is surely doing a good job of ensuring that the inflows will shift the direction of inflation and interest rates.  They will most likely see a small room to have more easing if the peso continues its appreciation.  Second, the sectors that are benefiting from the growth are not directly linked to where large number of unemployed are.  Hence, it will take a bit of time before the mass base benefit particularly agriculture.  Nonetheless, agriculture have already shown resiliency amidst natural calamities – signifying that productivity is improving in the sector.

Thus, on an overall perspective, 2013 is the go ahead year for the Philippine economy!  On a sector basis, the building blocks for setting base should be the sectors that will go overdrive – these will be supported by tourism, the BPO sector and remittances as internal strength.  Investment-wise, equities will continue to dominate especially as many listed firms are in the overdrive sectors.  Fixed rate investments will remain slow.  This is actually the best time to borrow for housing.  It will be a good time to renegotiate loans and debts.  Finally, we have to believe what we are seeing. I choose not to doubt the sustainability of this growth.  This is something that we have desired to happen in the past. Answered prayer indeed!

Alvin P. Ang has more than 20 years of professional experience in both public and private sectors.  He started his Economist experience with the National Economic and Development Authority (NEDA) of the Philippines where he developed his skills in Development Planning, Policy Formulation and Analysis.  He also worked in Investment Research and Economic Forecasting with his stints at the Philippine National Bank and All Asia Capital as Chief Corporate Planner and as Economist, respectively.  Within those periods, he has been teaching part-time at the University of Santo Tomas in Manila.  In 1999, he joined the academe as full-time Faculty member after completing his Master in Public Policy at the National University of Singapore as a Scholar of the Singapore Government.  He went on to complete his Ph.D. in Applied Economics at Osaka University in 2006 as a Japanese Government Scholar.  He has published in renowned journals such as the Review of Development Economics, Asia Pacific Social Science Review, among others.  His research fields are in Labor and Development Economics and his research interests include Privatization and Development Finance.  His researches on Remittances and Economic Growth in the Philippines have been widely circulated.  He has also consulted for the World Bank, World Health Organization, the European Union, Asian Development Bank, International Labor Organization and the USAID on policy matters. He recently won the first prize (together with Jeremaiah Opiniano) in the Outstanding Research for Development in the 2011 Global Development Awards (besting 400 entries worldwide)  held in Bogota, Colombia.  He is a lifetime member of the Philippine Economics Society where he currently is Vice President.  He is an advocate of responsible personal finance and has lectured on this topic in many fora.  Presently, he is a Full Professor of Economics at the University of Santo Tomas and Visitor Professor at the Ateneo School of Government.

I am pleased to present the outlook of an esteemed colleague of mine, a professor and a well-respected analyst, Mr. Joseph James Lago, RFP. James is one of those who I consult with regards to the technical intricacies of investments and the economy and his wealth of experience made him one of the most competent finance professionals that I know.

Here’s the 2013 Outlook of Mr. Joseph James Lago

On PSEi

With the expectation of a 2013 GDP growth of at least 6.0%, the awaited investment grade credit rating, the averted US fiscal cliff and signs of a global economic stabilization and possible turnaround as the euro zone mends itself, our initial upside for the PSEi is
6,300 – 6,500. We are guarded with our forecasts as: a) it will be difficult for the Philippine equity market to be among the region’stop performer for the fifth consecutive year; 2) the trailing and leading relative valuations are above its historical and regionalaverages; c) a continued moderate growth of the US economy will attract portfolio flows as US stocks are still undervalued; and d) will the investment grade rating of the country translate to an
improvement in the more relevant FDI flows that generate real economic activity and real employment?

It must not be lost that markets have their ups and downs and the PSEi deserves a proper, healthy correction. This is to cap exuberance and bring relative valuations to reasonable levels for a firmer footing.

We see the immediate supports of a healthy correction for the benchmark index at 5,750 and 5,500.

On the concern of the local market’s price-earnings and price-to-book ratios that are above its historical and regional averages, it could be bearable if we are talking of a deep equities market where we have at least 200 actively traded, fundamentally sound firms to choose from as the market average is skewed by those with large market capitalization. Sadly, of the more than 300 PSE-listed issues, less than 100 meet our fundamentally sound, actively traded screen.

Peso – US dollar

The peso has decoupled from the US dollar last year as a result of sustained portfolio investment inflows, plain and simple. The continued appreciation of the peso is a continuation of a rise that began in November 2008. An appreciation to 39.75 or even 39.00 is almost a given. Should this occur, what we are seeing is a complete recovery of the peso from its May 1999 – July 2005 depreciation (where we saw it at 56.45). On the other hand, the peso is also prone to bouts of sharp depreciation when portfolio investments becomes outflows. A healthy weakening of the peso could see it dipping to 42.00 – 43.00 versus the dollar within the year.

Domestic Fixed Income Yields

2012 saw Philippine yields touching new record lows as portfolio inflows continued to pile on to peso-denominated debt instruments for better returns. This is a “new normal” phenomenon for emerging and regional markets. The unusually low interest rate environment will still continue in 2013. We see longer-tenor yields still testing new lows. The net effect is still a normal yield curve with a reduced steepness and a narrower spread between the average short and long-term yields compared to last year. This can also give the BSP room for another 25 – 50 basis points cut in its benchmark policy rates.

Portfolio Strategy

For equities, we advice investors to go for stocks that are still undervalued (trading below the market’s average PER and PBV) and temporarily under-performed the PSEi’s return last year. These cannot be overlooked forever as rotational buying and portfolio rebalancing are a fact of life as investors seek better returns. Stocks that fit these constraints or filters surprising have attractive dividend yields, some of which are even higher that what you can get from 10-year debt papers now. For fixed income, it is time to look at, and consider, some PSE-listed preferred shares as the yields are certainly better. There is almost no way investors can get real positive returns and beat inflation this year if the fixed income portfolio is skewed to the short and medium-term debt instruments and deposit products.

Joseph James Lago is the Head of the PCCI Securities Brokers Corp. He has over 2 decades of experience in the investments industry in various capacities. He is also a professor of the De La Salle University Graduate School teaching in Management and Economics. He is a much sought after researcher, economist and analysts.