Weak Peso Damps Investor Sentiment for Philippine Firms

Manulife Investment Management and Trust Corp. (Manulife IM) expects the peso’s weakness to weigh on investor sentiment for companies earning revenue in the domestic currency. "Investors tend to react negatively to peso weakness because it affects both market returns and underlying fundamentals of companies. Falling share prices can be compounded by FX (foreign exchange) losses, while fundamentally, depreciation can raise imported input costs and increase the peso value of unhedged foreign-currency debt," said Elle Jami, Head of Equities at Manulife IM, in a commentary on Thursday. She added that a company’s risk exposure to the peso depends on how much of its cost base is dollar-linked. Domestic companies with peso revenue that are import-reliant and have foreign-currency liabilities are more vulnerable to margin pressure, she said. Meanwhile, those with foreign-currency revenue and largely domestic costs have a natural hedge and can possibly see earnings boost from the peso’s weakness. "A weaker peso can benefit exporters and companies earning in dollars, particularly when a large portion of their costs remains peso-denominated. But that advantage can be offset by imported inputs or foreign-currency debt, whose peso cost rises as the currency weakens," Ms. Jami noted. "I would focus on the currency mix of revenue, costs and debt and whether peso weakness is accretive or dilutive to earnings and cash flow.” Foreign investors are likewise considering the currency’s stability as they measure returns in their home currency, as a strong equity return can be partially or fully offset by currency depreciation. This also makes capital raising in the Philippines more difficult compared to other markets in Southeast Asia, Ms. Jami said. "That said, currency is only one part of the allocation decision. Investors will still weigh earnings growth, valuations, liquidity, governance and the broader macroeconomic outlook alongside FX risk.” She also said a sustained peso recovery would not suffice to fully prop up investor sentiment as this needs to be accompanied by stronger earnings and improving macro fundamentals. Still, this could reinforce foreign inflows and create a “more constructive feedback loop” for overall market sentiment. Ms. Jami said long-term investors can still find attractive entry points despite the peso’s weakness if currency movements affect company earnings and the outlook remain intact. "For long-term investors, the key is determining whether currency move changes any given company’s normalized earnings and cashflow outlook, which could come from foreign-currency debt and hedging, imported input exposure, pricing power, and whether revenue provides a natural currency hedge,” she said. "If those fundamentals remain intact and the decline is largely the result of broader risk-off sentiment or foreign selling, peso-driven weakness can create attractive entry points.” However, the lower valuation may directly reflect a deterioration in intrinsic value if further currency depreciation structurally compresses margins, increases leverage, or weakens the company’s ability to reinvest. "The distinction is whether the currency is affecting price or value and sometimes it is affecting both,” Ms. Jami said. — Aaron Michael C. Sy