July 2012

MARKET CALL

The

Capital Markets Research

FMIC and UA&P Capital Markets Research

Macroeconomy Recent Economic Indicators

2 21

Fixed-Income Securities Contributors

9 24

Equity Markets

16

Macroeconomy

Q2 PROMISES TO BE EVEN BETTER

2 Recent economic indicatorshigher electricity sales growth, more than a million jobs created, inflation easing, improving exports, and better agricultural output due to favorable weather, among othersare pointing towards an even faster output growth in Q2 from the 6.4% Gross Domestic Product (GDP) posted in Q1. The upgraded outlook for 2012-Q2 GDP expansion is more remarkable given the slowdown of the U.S. economy and China, two main engines of world growth, and the lingering banking and debt crisis in the Euro-zone focused on elections in Greece, which held the world in tenterhooks. The outcome was fairly positiveNo Grexitfollowed by some concessions by Germany in favor of growth for beleaguered Spain and Italy, core countries in the Eurozone. Meralco Sales back to Double-Digit Growth in May
The likelihood of an even better GDP growth performance in Q2 moved a level higher with Meralco electricity sales rising by 11.8% in May, a lot more spritely than the 8.3% gain recorded in April. On average, Q2 growth was at 10.2% which is higher than Q1s 9.9%. More telling is that the impetus for this faster pace originated from a 19.7% increase in energy sales to the Industrial sector, the fastest growth in two years. To be sure, sales to all the sectorsresidential, commercial and industrial exhibited an accelerated pace. The largest jump occurred in the Industrial sector which took off from 11.1% in April to 19.7% in May. This was followed by the Commercial sector which was quicker at 8.9% from 6.1% in the previous month. The residential sector had the slowest improvement from 8.6% in April to 8.7% in May. Meralcos April sales climbed 8.3% higher than same month a year ago. This was consistent with the uptick in Volume of Production Index (VoPI) of 5.5% year-on-year (y-o-y) growth as tracked down by NSOs Monthly Integrated Survey of Selected Industries (MISSI). For the sectoral breakdown, Aprils industry sales grew double-digit at 11.1% but lower than Marchs 16.9%. Similarly, sales to the Commercial sector eased to a 6.1% growth from 11.0% in March. The residential sector sales also experienced a slowdown to an 8.3% expansion from 13.3% in March. The VoPI also experienced a deceleration in April to 5.5% from 8.9% in the previous month. Nonetheless, it has exhibited an upward trend since December of 2011. Out of the twenty (20) industries, thirteen (13) were tagged as gainers while six (6) greatly contributed to the overall VoPI growth. The six industries were furniture and fixtures (+234.6%), publishing and printing (+131.5%), footwear and wearing apparel (+88.9%), wood and wood products (+40.6%), leather products (+25.7%), and chemical products (+12.9%). With the school year starting early in June, Meralco sales are expected to improve in double-digit terms. We think therefore that VoPI in May and June will show a faster pace than April. And with better agricultural harvests and more infrastructure spending, we expect GDP growth in Q2 to even exceed the 6.4% expansion recorded in Q1.
Figure 1 - Meralco Sales & Volume of Production Index Growth Rate (year-on-year)

Sources: Meralco, National Statistics Office (NSO)

The Market Call - July 2012

Macroeconomy

The labor market appears positive as infrastructure projects by the government, PPP projects and business expansions gain in momentum through H2.

3 Unemployment Rate Drops to 6.9% as of April

With the economys strong rebound in Q1, labor employment also increased by 1.02 M for the year ending April 2012. Thus, despite an increase in the labor force participation rate to 64.7% from 64.2% a year ago, the Labor Force Survey (LFS) of the National Statistics Office (NSO) showed a decline in the unemployment rate to 6.9% down from 7.2% in January 2012 and April 2011 even as total labor force expanded by 2.5% over the same period. The Services sector continued to dominate the working arena accounting for 50.4% of overall employment, a sizeable fall from 52.7% in the previous quarter and only slightly off from a year ago. Despite this, the Services sector actually added the most number of jobs (414,000) for survey period. The Industry sector, which had a 15.6% share of total employed, contributed 270,000 net new jobs with the Construction industry providing the bulk of it as it employed 173,000 more workers. By adding 337,000 net new jobs, Agriculture sector grabbed a 33% share in overall employment. This, however, represented a slowdown in y-o-y growth rate from 5.6% to 2.8% a year ago. The sustained upswing in the property market led to the biggest employment gains in the Real Estate, Renting, and Business Activities. of 224,900. Similarly, the uptrend in tourism arrivals, tracked at 14.9% for the first four months of 2012 translated into 179,900 net new jobs in Hotels and Restaurants sector. All the components of the Industry sector saw gains in net jobs. While the Manufacturing sector provided the next highest number of openings (48,900) after Construction, the Mining sector was not far behind with 44,000 additional workers, representing a continuous positive run since April 2009. In terms of occupations, there were no significant changes in the different types of jobs. Noteworthy are the numbers of Laborers and Unskilled Workers where 522,700 joined the employed work force, representing an increase to 33.2% of total employed from 32.7% a year ago. Supporting the gains in the Manufacturing sector, 212,600 additional plant, machine operators and assemblers were hired. On the negative side, the number of Clerks declined by 52,400, causing its share to total employed to fall to 5.5% from 5.8%. Based on the class of worker, the number of Wage and Sa-lary Workers rose by 3.7%, as this segment added 750,000 to the ranks of the employed. The Self-employed Individuals increased by 188,200, while Unpaid Family Workers added 121,400 into the employed. Not all the numbers had positive implications. For one, those who worked more than 40 hours or more in a week declined by 1.6 M. It was offset by the 2.5 M gains in those who worked less than 40 hours. Thus, the underemployment rate rose to 19.3% from 19.1% a year ago. The employment numbers as of April seems to be resilient as the target of 1M net jobs was still attained. Thus, in four of the last five quarters, net new jobs exceeded 1 M. The labor market appears positive as infrastructure projects by the government, PPP projects and business expansions gain in momentum through H2.
Figure 2 - Net New Jobs Created (000) Year Ending Survey

Source: National Statistics Office (NSO)

The Market Call - July 2012

Macroeconomy

Tax revenues rose by only 8.9% (y-o-y) in May due to the sub-par performance of the BIR which posted only a 7.3% increment over a year ago.

4 May Inflation Rate Back to Below 3%

With Dubai crude falling from $118.90/barrel on May 2nd to $101.80/barrel in May 31st, contrary to the expected oil price hike and food supply remaining abundant, the headline inflation rate in May slowed 2.9% from 3.0% in April, as we had expected. Year-to-date (YTD) inflation average hit 3.0%, which is at the low end of the target of the Bangko Sentral ng Pilipinas. Core inflation, which excludes volatile food and oil prices, however, inched up to 3.7% in May from 3.6% in April. On the year-on-year (y-o-y) basis, the decline in global oil prices was very evident since Fuel, Light and Water (FLW) eased to 4.3% from 4.7% and it also affected the Transport index which decelerated to 3.3% from 3.5%. Food and Non-Alcoholic Beverages index maintained its rate of 1.8%, while others minimally moved. Meanwhile, Clothing and Footwear registered the highest acceleration of 5.2% from 4.6%. On the monthly basis, May inflation only posted a 0.08% from 0.78% increased in April. Still the evident rate decelerations were in FLW and Transport. FLW index declined to -0.08% from 1.29%, while Transport index also reversed to -0.39% from 1.04%. These declines were coupled with stable Food and Non-Alcoholic Beverages index at 0% from 0.65%. All other indices declined except for Restaurants and Miscellaneous Goods and Services (RMGS) index which had a faster pace of 0.57% from 0.49%. The seasonally adjusted annualized rate (SAAR) eased from 4.8% to 2.8% due to a sharp slowdown in SAAR Food to 5.2% from 13.2% which more than offset an acceleration of Non-Food to a still low 0.4% from -3.4%. For Q2 this year, inflation will likely average 2.9% as compared to y-o-y growth as well as quarter-on-quarter (q-o-q) mainly due to the unabated fall in oil price for the whole of June (Both Brent and Dubai fell below $90/barrel for a few days). West Texas Intermediate (WTI) recently posted even below $80/barrel in June. This situation is not likely to change much because the U.S., the worlds largest oil importer, is importing 10% less crude oil, as a result of its successful exploitation of shale gas and oil. Besides, significant gains in rice and other crop harvests should ensure stable food prices. Thus, it is unlikely that inflation would rear its ugly head for the rest of the year.
Figure 3 - Inflation Rates Annualized (2007-2012) Seasonally Adjusted Vs. Year-on-Year

Source: National Statistics Office (NSO)

NG Spending Rebounds to 18.3% Gain in May

Weak tax collections and expenditure rebound resulted in a budgetary deficit of P19.9 B in May bringing the yearto-date total to P22.8 B, or just about a fourth of the programmed P109.3 B deficit for H1. This leaves much room for the National Government (NG) to spend more in the rest of the year, and thus provide further stimulus to the rebounding economy. Tax revenues rose by only 8.9% (y-o-y) in May due to the sub-par performance of the Bureau of Internal Revenue (BIR) which posted only a 7.3% increment over a year ago. The Bureau of Customs (BOC) did better this time around by ramping up its tax take by 15.5%, despite the peso appreciation. This implies significantly higher imports which would suggest better exports and industrial growth in May-June. Non-tax revenues expanded by 16.2% making up a bit of the slack from the BIR.

The Market Call - July 2012

Macroeconomy

... latest bank enhancements mandated by BSP focused on good governance in banks and the lifting of the ban for opening new bank branches or further expansion.

5
In terms of spending, NG resumed its double-digit growth as expenditures, excluding interest payments, bloated by 18.3% compared to 5.4% in April. Since allotments to local government units, which usually account for 16-18% of NG spending, only grew by 0.2%, it would be reasonable to conclude that there has been an acceleration in infrastructure spending during the month. After all, the Department of Public Works and Highways has said that by May, they had rolled out more than 80% of their projects. Despite the spending spree, which started in a big way in Q1, the YTD primary surplus (deficit or surplus, excluding interest payments) reached P108.2 B, roughly the same level as the same period last year. It was also more than double the programmed primary surplus of P46.5 B, and this will contribute to reducing the debt-to-GDP ratio to around 48% by year-end. If the larger income figure, Gross National Product or Gross National Income is used, the current trend is for the debt-ratio to fall to 36%, which is even better than Thailand or Malaysia. as the money multiplier declined to 3.52, a decline of 8.1% on a year-on-year basis from 3.83 due to banks choosing to be selective in their lending. The latest bank enhancements mandated by BSP focused on good governance in banks and the lifting of the ban for opening new bank branches or further expansion. The probable reason for the latter is to provide more competition and bring down lending rates. We expect the BSP to maintain their stance on the key policy rates while the debt crisis in Europe continues to linger, even though we argued previously (ref. TMC MayJune 2012) that it would be better to lower rates further with little or no inflationary pressure.
Figure 4 - M1, M2, & M3 Money Supply Growth Rates (y-o-y)

Money Expansion Seen at 9% in April

Money supply (M2 and M3) expanded by 9% in April, representing an improvement from less than 6% in March. Despite the money expansion and the 6.4% Gross Domestic Product (GDP) growth in Q1, the Monetary Board of Bangko Sentral ng Pilipinas (BSP) kept key policy rates unchanged. The reverse repurchase (RRP) or overnight borrowing remained at 4% while the repurchase (RP) or overnight lending facility remained at 6% in June. At the same time, special deposit account (SDA) rate was kept at 4.2%. The policy stance has been unchanged since March, leading to the current more desirable money growth. In April, BSPs money infusion into the economy as reflected by Reserve Money (RM) remained at the same pace of 18.7% in March and April. Relative to March, the two components of RM, Net Foreign Asset (NFA) and Net Domestic Asset (NDA) in April decelerated to 10.3% from 14.3% and 5.4% from 11.6%, respectively. Meanwhile, Special Deposit Accounts (SDAs) facility grew double-digit by 10.2% (P1.6 T), better than 5.9% in March. Money supply (M2 or M3) expanded less than the growth in RM

Source: Bangko Sentral ng Pilipinas (BSP)

Exports Growth Back to 7.6% in April

Exports growth recovered to a 7.6% growth after the -0.8% revised number last March. This may still be viewed as a resilient expansion considering the weak demand from Eurozone (-19.2%) and the surprising plunge in Electronics exports by -23.8%. Besides, for the first four months of 2012 Exports totalled $17.5 B, 5.5% higher than $16.6 B in the same period last year. The share of Electronic products to total exports declined to 36.3% from almost

The Market Call - July 2012

Macroeconomy

Exports growth in April showed an encouraging 7.2% gain, improving from Marchs -2.4%.

6
2/3, on average in the past decade. But non-electronics manufactured exports took the slack by surging by 82.2%, even as agricultural, petroleum and mineral products shipments fell. Top gainers were Ignition Wiring Set and Other Sets Used in Vehicles, Aircrafts and Ships (+145.9%), Metal Components (113.2%), Gold (+80%), Pineapple and Pineapple Products (+32.3%), Bananas (fresh) (+20.1%). Main Losers, on the other hand, were Coconut Oil (-53.9%), Electronics Products (-23.8%), and Petroleum Products (-6.0%). For the month-on-month record, exports growth in April showed an encouraging 7.2% gain, improving from Marchs -2.4%. Manufactured products monthly movement reversed to 7% from -4.4% in the previous month. AgroBased Products sped up to 7.2% from -2.9% while Mineral products were up by 36.9% from -27.4% as a result of higher output. Petroleum export growth decelerated heavily from 398.6% to -35.26% as Petroleum Products prices continued their downward trend.
Figure 5 - Monthly Export Growth Rates (y-o-y)

runner-up position by garnering a 14.6% share aided by the 19.2% gain in April exports to that country. For the third spot, Republic of Korea (ROK) outperformed China as ROK absorbed 14.2%, at the back of a phenomenal 211% growth in April. Chinas share in total exports, on the other hand, slipped to 10.7%, as it could only manage a 1.2% growth during the month. Exports growth for the succeeding months can be hindered by the undesirable territorial dispute between China and the Philippines coupled with the weakening demand from Eurozone. To offset these, however, U.S. demand appears to be stable while an upsurge of shipments to neighbouring countries like South Korea should not be overlooked.

OFW Remittances Resilient as April Growth at 5.3%

Despite the decline in Overseas Filipino Workers (OFW) remittances from EU countries, $ inflows from OFWs grew by 5.3% in April, slightly faster than the 5.0% uptick in March, but slower than the 6.3% pace a year ago. In April, remittances posted $1.7 B, higher in actual value since January, partly due to advance preparation for tuition fees and additional school year opening expenses. Remittances tend to be stable and resilient since growth rates from January to April registered 5% above. Although the festering Eurozone debt and banking crises surely affected cash transfers, evidenced by the -14.7% decline in remittances from EU countries, this was more than offset by the inflows from Asia and America. Again displaying resiliency in the face of the crisis, remittances for the first four months of this year rose by 5.4%, not too far behind the 6% pace seen for the same period in 2011. The continued demand for Filipino workers around the globe and the banks expansion to different countries via financial services and other remittance-related efficient offerings have contributed to this stability of OFW remittances to the country. The Philippines Overseas Employment Administration (POEA) finally approved new deployment of OFWs to 31 additional countries. This can further quicken the growth stride in succeeding months. Meanwhile, Congressman Theresa Bonoan-David of Manila has recently proposed a law amendment for

Source: National Statistics Office (NSO)

With respect to export destinations, Japan remained in the top spot with a 15.9% share of total exports, up from 15.4% in March. United States of America retained the

The Market Call - July 2012

Macroeconomy

...the Philippine economy appears to be on a roll as the economy seems to be in a sweet spot of faster growth and slower inflation.

7
the Overseas Workers Welfare Administration (OWWA) Emergency Repatriation Fund which demands additional contribution and support for OFWs. In addition, the ban for at least 18 countries that were considered unsafe was lifted in June. When viewed in peso terms, which provide an indication of the stimulative effect of OFW remittances on the domestic economy, April registered P72.6 B or 3.3% higher than Marchs peso growth of 3%. The 1.9% appreciation of the peso in April from March lessened the amount of pesos that entered the financial system. While the ongoing Eurozone crisis will have a negative effect on OFW remittances in H2, the stable US economy and the domestic demand stimulus in East Asia should enable the country to continue to see a 5-7% growth for H2.
Figure 6 - OFW Remittances Growth Rates (y-o-y in US$ and PhP Terms)
35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12
US$ PhP

or a bit stronger than P42.85/$ rate average in May. While this was aided by the usual strong OFW remittances to meet school opening expenses, net portfolio flows had much impact as well. The PSE reported that foreigners were net buyers in the month to the tune of P36.9 B. Such appreciation made Q2 foreign exchange average settle at P42.78/$ compared to P43.04/$ in Q1. For the moment, due to the unforeseen movements in the global economic arena, peso may continue to be volatile as external forces can heavily offset appreciation bias of the peso. Nonetheless, based on the graph, 200-day Moving Average (MA) indicates a stable rate, while 30-day MA points to further appreciation bias, which may become a reality either because of favorable developments in the Eurozone or more portfolio capital inflows in expectation of a credit upgrade.
Figure 7 - Daily Peso-Dollar Exchange Rate
44.5 44.5 44 44 43.5 43.5 43 43 42.5 42.5 42 42
41.5 41 40.5
Peso/Dollar Exchange Rate Peso/Dollar Exchange Rate 200-Day Moving Average 200-Day Moving Average 30-Day Moving Average 30-Day Moving Average

Jan-12 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Feb-12 Feb-12 Mar-12 Apr-12 Oct-11 Dec-11 Apr-12 Jun-12

Source: National Statistics Office (NSO)

Source: Bangko Sentral ng Pilipinas (BSP)

Peso Back to Appreciation Mode in June

While the peso-dollar rate was under pressure prior to the elections in Greece (June 17), the situation reversed quite rapidly after the results came out. Thus, in June, pesodollar exchange rate still ended at an average of P42.70/$

The Market Call - July 2012

Macroeconomy

Monetary policy is likely to remain neutral for the rest of the year in order to narrow the differential between domestic and foreign interest rates.

8 Outlook
While the world frets and worries about the impact of the Eurozone banking and debt crises, the Philippine economy appears to be on a roll as the economy seems to be in a sweet spot of faster growth and slower inflation. With industrial electricity sales growth zooming to a 2-year high of 19.7% in May, and public spending up by 18.3%, and new jobs still over 1 million in April, the outlook for GDP hike in Q2 looks even more promising than Q1. This, together with the rest of the outlook below, enables us to upgrade our full year projection for GDP growth to 6-7%. Inflation has subsided further from an average of 3.1% in Q1 to 2.9% in Q2, giving consumers more room to boost spending. This is a result of the turnaround in crude oil prices where at one time Brent and Dubai crude oil plunged to below $90/barrel, even as the West Texas Intermediate (WTI) crashed through the $80/barrel. This was no fluke as crude oil imports of the U.S. (worlds largest importer) were dropping by 10% recently, while output has been rising at 11% due to the exploitation of shale gas and oil. There is little upward pressure and so inflation in Q3 is likely to average 3.0%, which is at the low end of the BSPs target range of 3-5%. Monetary policy is likely to remain neutral for the rest of the year, even though the BSP has scope and need for further easing in order to narrow the differential between domestic and foreign interest rates. Total fiscal deficit up to May is only P22.8 B which is only 21% of the projected deficit of P109.3 B for H1. It is likely to end up at only 60% of the programmed deficit for H1, despite accelerated infrastructure spending in May-June. This gives NG much for further stimulation in H2. Exports are likely to average a 5% growth in Q2, with slightly better prospects in H2. The latter period will be characterized by domestic demand stimulus in China and election spending in the U.S. With favorable conditions in the financial markets, and stable gains in OFW remittances, the peso-dollar rate will have an appreciation bias for most of H2. However, as the year ends and details of how Spain and Italy will be allowed to grow becomes clearer, while the U.S. recovers from the Q2 slowdown with election spending, the dollar may regain attractiveness in Q4 and so the pesos appreciation bias would be tempered.
Forecasts
Rates Inflation (y-o-y %) 91-day T-Bill (%) Peso-Dollar (P/$) 10-year (%) June 2.8 2.15 42.23 5.22 July 3 2.15 41.93 5.10 Aug 3.2 1.88 41.72 4.70 Sep 3.4 2.12 41.52 5.28

Source: Authors Estimates

The Market Call - July 2012

Fixed Income Securities

Eurozone Crisis Temper Good Fundamentals

9 With inflation easing slightly in May to 2.9% (due to lower oil prices), to bring the 5-month average to the lower end of the inflation target of 3-5%, the BSP has maintained policy rates in its last two meetings to further support the growth momentum of the economy which expanded faster than expected in Q1. In addition, the government registered a five-month deficit of P22.79 B as government spending reached its highest in May amidst slowing revenue collection. The deficit was only 22% of the P109.34 B deficit cap in H1. With continued benign inflation outlook and sound fundamentals, Moodys has upgraded the countrys outlook from stable to positive in contrast to the downgrades that plagued Europe. All eyes are focused on Europe as the EU Summit agreed in principle for greater monetary unity and more emphasis on growth. Investors are awaiting further details as uncertainty lingers despite the relatively positive results of the Greek elections. Nevertheless, domestic bond yields may not move up much as the government announced its borrowing plans for Q3 to be P108 B (below same period in 2011) given its strong cash position. Primary Market: Rejections and Bias for the Longerend Continue
Rejections and partial awards have led T-bill yields to fall from the highs it enjoyed in Q1 signaling the governments strong cash position as the Treasury awarded only 53.29% of its total offer in Q2. June auctions before the Greek elections (June 17th) were predictably undersubscribed as investors exercised caution. Risk appetite later rebounded as full awards were given in the auctions following the vote as investors posted bids closer to the rates prevailing in the secondary market. The 91-day T-bills were last sold in the April 30 auction as the paper drew throwaway bids that were higher than the secondary markets 2.2%. If the bids in the June 11th auction were accepted, the 91-day rate would have been 2.878%, a jump of 70.4 bps from its last sale.Similarly, the June 25th auction would have resulted in a 72.1 bps climb from the papers last sale to 2.895%. Moreover, both auctions in June saw the 3-month papers undersubscribed which has prompted the Treasury to reduce its offer to P1 B in the succeeding auctions (in Q3) in response to the weak demand. The 182-day yield was at a Q2 high of 2.4% in April 16 but has since fallen to 2.274% in the June 25th auction. On June 11th, bids for the six-month papers were rejected as investors gave high bids that would have upped the rate to 3.01% which was 70.5 bps higher than the secondary market. On the other hand, the June 25th auction was fully awarded as it resulted in a 2.274% yield, or a tiny 2.6 bps lower than its last sale on May 28. The 364-day yield also fell from a Q2 high of 2.6% in April 16 down to 2.24% in the June 25th auction. Bids for the one-year papers were rejected in the June 11th auction as it would have pushed up the rate to 3.201%, or 70.1 bps higher than its last sale and 68.1 bps higher than the secondary market. The June 25th auction resulted in a 5 bps lower rate at 2.45%. NG displayed a similar tough attitude for the two longdated offers. The 7-year bonds auction on June 5th resulted in complete rejection as tenders fell short of the offer, undersubscribed 0.66x and the bids trying to push the rate up to 5.334%. That would have been 33.4 bps higher than its previous sale and 24.4 bps premium over the secondary market yield. The rejection of the papers further affirms the illiquid nature of the tenor as it only has P3.7 B worth of outstanding volume in the secondary market. Meanwhile, the 20-year bonds auction on June 19 was oversubscribed 1.57x but was only partially awarded with P6.65 B out of P9 B. The rate was capped at 6.024%, an 11.8 bps climb. The government ended Q2 borrowing only P56.75 B or 54% of its offers as it appeared awash with liquidity. For Q3, the government plans to borrow P108 B or less as the

The Market Call - July 2012

Fixed Income Securities

With the Greek debt crisis cooling off, at least until the end of the year, and inflation expected to keep at the lower end of the BSPs inflation target of 3-5%, the outlook for H2 looks more promising.

10
government has posted a P22.79 B five-month deficit, well within the H1 ceiling of P109.34 B. NGs borrowing program for Q3 is slightly lower than for the same period last year. While there seemed to be a bias for the longer-end of the curve on the part of investors, the market is in search for more papers in the 5-10 year space, as mark-to-market losses bloated in Q2, and there was a negative response to the proposed 15-year and 20-year Retail Treasury Bonds (RTBs). With the Greek debt crisis cooling off, at least until the end of the year, and inflation expected to keep at the lower end of the BSPs inflation target of 3-5%, the outlook for H2 looks more promising.

T-Bills and T-Bonds Auction Results Date 2-Apr T-Bond/T-Bill 91-day 182-day 364-day 10-Apr 16-Apr 5-year 91-day 182-day 364-day 24-Apr 30-Apr 7-year 91-day 182-day 364-day 10-May 14-May 10-year 91-day 182-day 364-day 22-May 28-May 15-year 91-day 182-day 364-day 5-Jun 11-Jun 7-year 91-day 182-day 364-day 19-Jun 25-Jun 20-year 91-day 182-day 364-day Totals All Auctions Offer (PhP B) 2.00 2.00 3.50 9.00 2.00 2.00 3.50 9.00 2.00 2.00 3.50 9.00 2.00 2.00 3.50 9.00 2.00 2.00 3.50 9.00 2.00 2.00 3.50 9.00 2.00 2.00 3.50 106.50 Tendered (PhP B) 4.270 1.400 3.250 15.440 2.765 4.690 6.850 10.98 5.620 6.540 6.700 14.71 2.970 2.400 3.950 7.560 2.000 3.300 5.050 5.96 1.66 1.800 3.050 14.098 1.930 3.600 5.133 147.68 Awarded (PhP B) 2.00 9.00 2.00 3.50 3.7 2.00 2 3.5 9.00 2.40 2.00 3.50 6.65 2.00 3.50 56.75 Tendered Offered 2.14 0.70 0.93 1.72 1.38 2.35 1.96 1.22 2.81 3.27 1.91 1.63 1.49 1.20 1.13 0.84 1.00 1.65 1.44 0.66 0.83 0.90 0.87 1.57 0.97 1.80 1.47 1.47 Average Yield 2.494 4.61 2.40 2.60 4.999 2.174 2.258 2.584 5.42 2.518 2.30 2.50 6.024 2.274 2.45 Change -(bps) 11.10 -6.40 -5.00 -20.80 276.40 -32.00 -14.20 -1.60 26.10 -6.60 4.20 -8.40 11.80 -2.60 -5.00 -

Source: Bureau of the Treasury (BTr)

The Market Call - July 2012

Fixed Income Securities

Average weekly traded volume of GS was significantly lower at P49.09 B for the second quarter versus the P91.22 B of the first quarter.

11 Secondary Market: Watching in the Side Lines and Fishing in the Longer End
Debt yields traded flat in the days leading to the Greek election as investors waited anxiously on the side lines. Despite this, yields declined especially at the long-end of the curve due to concerns on debt supply as the government continued rejections and partial awards for the month and following Moodys upgraded outlook. The 5-year papers weekly average yield ended 11 bps lower in the last week of June versus the first week. The 10-year papers fell 14 bps while the 20-year slipped by 6 bps. The 25-year registered the largest drop at 19 bps as the month came to a close.
Figure 8 - Yield Curve (PDST- R2)
7 6 5 4 3 2 1 0 3M 5Y 10Y 20Y 25Y Jun4-Jun8 Jun18-Jun22 Jun11-Jun15 Jun25-Jun29

Figure 9 - FXTN Yields

7 6 5 4 3 2 1 0 7-43 5-67 10-42 10-52 20-17 25-08 14-Mar-12 14-May-12 13-Apr-12 14-Jun-12 7 6 5 4 3 2 1 0

Source: First Metro Investment Corp. (FMIC)

Average weekly traded volume of GS was significantly lower at P49.09 B for the second quarter versus the P91.22 B of the first quarter. The year-to-date (YTD) weekly average for June 2012 was lower at P65.48 B compared to year ago levels at P79.49 B.
Figure 10 - Trade Volume (in billions)
Apr Wk1 Apr Wk 2 Apr Wk 3 Apr Wk 4 May Wk 1 May Wk 2 May Wk 3 May Wk 4 May Wk 5 Jun Wk 1 Jun Wk 2 Jun Wk 3 Jun Wk 4 0 20 40 60

Source: Philippine Dealing and Exchange Corp. (PDEx)

FXTN yields barely changed with the longer-end of the curve having a slight uptick of 4.8 bps for the 20-17 and 3.5 bps for the 25-08 as bond swaps for shorter securities at the end of the month were announced. The shorter end of the curve was fairly stable as the 7-53, 5-67, 10-42 and 10-52 series remain unchanged.

2012 YTD (Jun 29) = P49.09 B 2011 YTD (Jul 1) = P74.49 B

80

100

120

Source: Philippine Dealing and Exchange Corp. (PDEx)

The Market Call - July 2012

Fixed Income Securities

Appetite for corporate papers increased as more papers became available and fewer treasury papers were issued.

12
Traded volume in the early part of June rose due to a buying frenzy with players scrambling over debt supply concerns as the government continued to reject bids and scrapped the planned fund raising for PSALM. Lower turnover was observed in the week before the Greek vote as investors remained cautious. Investor demand recovered after that as positive market sentiment followed the BTrs cap on the 20-year papers. Nevertheless, players remained as fencesitters looking for firm leads on a clearer resolution of the banking system assistance and allowance for more growth for two core countries--Spain and Italy--more affected by the Greek malaise. sides, as its total turnover was P316.25 M. This was, however, a big drop from P1.1 B in April, probably due to the fear of investors of oversupply of its papers as it announced plans to have a mammoth P80 B preferred share issuance in Q3. Ayala Land Inc. (ALI) papers was the third most traded corporate instrument amounting to P180.2 M, followed by Power Sector Assets and Liabilities Management (PSALM) which had P141.59 M while Energy Development Corporation (EDC) traded P97 M. The latter three corporations showed lower demand compared to April, with the steepest fall recorded by ALI (see graph).
Figure 12 - Corporate Trading (in millions)
3,500 3,000 2,500 2,000 1,500 March 2012 April 2012 May 2012

Corporate Bonds: May Trading Volume Up Year-onyear, But Down from April
Appetite for corporate papers increased as more papers became available and fewer treasury papers were issued. Volume peaked in April at P2.01 B (please refer to figure 11) but slid down in May to P1.44 B. Nevertheless, May 2012 saw a 220% increase y-o-y.
Figure 11 - Total Corporate Trade Volume (in millions)
2500 2011 2000 1500 1000 500 0 March April May 2012

1,000 500 0 PSALM SMC EDC AC ALI

Source: Philippine Dealing and Exchange Corp. (PDEx)

Corporate Issuances
Filinvest Land Inc. (FLI) raised P7 B in its first-tranche of PRS AAA rated 7-year bonds with a coupon rate of 6.2731% last June 8. The company plans to issue another round of 7-year bonds worth P4 B in its second-tranche this coming October. Proceeds would be used to finance capital expenditures for its property development projects. On June 25, Vista Land and Lifescapes, Inc. (VLL) raised an additional P1.5 B within the 60-day window after its fund-raising in April. The company originally planned to issue P3 B worth of 5-year fixed-rate unsecured domestic corporate notes with a coupon rate of 7.25%.

Source: Philippine Dealing and Exchange Corp. (PDEx)

Ayala Corporation (AC) debt papers traded the most in May, with a turnover of P647.6 M, a significant increase from the previous months, which was practically nil. San Miguel Corporation (SMC) instruments continued to attract market players on both the bidding and offer

The Market Call - July 2012

Fixed Income Securities

Yield spreads narrowed as the peso continued to appreciate owing to a weaker dollar due to disappointing US economic data released in June.

13
However, strong demand prompted the company to exercise its option to upsize the offer to P4.5 B. The funds raised will be used for debt refinancing and general corporate expenses. SM Investments Corp. (SMIC) launched P7.5 B worth of PRS AAA fixed-rate retail bonds with an option to double it to P15 B. The bonds will be issued in two tranches Series C (7 years) with a coupon rate of 6% and Series D (10 years) with a coupon rate of 6.94%. The offer period will run from June 27 to July 6. Proceeds will be used for capital expenditures and general corporate purposes.

ASEAN+1: Yields Curves Steepen, except for Indonesia and Thailand

US: With the edginess over Eurozone problems at fever pitch, US Treasuries continued its function as a safe haven for increasingly risk averse investors. Bond yields across the curve continued to drop especially at the longer end of the curve. The 1-year papers were down 1 bps but the 2-year papers had a slight uptick of 0.8 bps. The 5-year papers fell by 4.8 bps while the 10-year papers declined by 19.3 bps. The Federal Reserve announced the extension of Operation Twist as it attempts to keep long-term interests low by buying back long-tenored papers and selling more short-tenored ones. Nonetheless, the greenback had not escaped scrutiny as weak economic data in May got replicated in June. GDP Q1 revised growth was lower than expected at 1.9% while job creation also fell below 100,000 after hitting above 200,000 consistently in Q1. Housing starts and prices, however, provided some basis for optimism. PRC: As GDP growth slowed to a near 3-year low at 8.1%, the Peoples Bank of China (PBOC) cut interest rates by 25 bps down to 6.31% to support the economy and buffer it from the potential impact of the Eurozone crisis. Movements in yields across the curve were slightly mixed as only the 5-year rate went up albeit minutely by 8 bps. Nevertheless the curve became steeper as the shortertenored bonds went down more than the longer end. The 1-year rates went down 14 bps while the 2-year dropped 24 bps. Meanwhile, the 10-year papers fell slightly by 5.6 bps. Moreover, the government has commenced repurchase operations to increase liquidity in the system and buoy the economy. Among other news, China pushed for sustainable growth in its corporate bond market with more companies to pass through scrutiny to avoid its expansion being marked with defaults. Indonesia: May inflation unexpectedly slowed down to 4.45% leading the Bank of Indonesia to maintain the policy rate at 5.75%. The yield curve flattened as yields for the 1-year papers climbed 36.1 bps while the 2-year went up 17.4 bps and the 5-year had an uptick of 0.1 bps. Meanwhile, the 10-year rates went down 5.6 bps.

ROPs: Yields Still Sliding for Longer Tenors

Yields fell greater for longer-tenor Republic of the Philippines dollar denominated bonds (ROPs). The curve became flatter as the ROPs14 had an uptick of 14.29 bps. Meanwhile, the ROPs16 fell 3.44 bps as the ROPs19 went down 7.01 bps while the ROPs32 declined the most by 12.83 bps. Yield spreads narrowed as the peso continued to appreciate owing to a weaker dollar due to disappointing US economic data released in June.
Figure 13 - ROPs
6 4 14.29 2 0 -3.44 -2 15-Mar-12 -4 16-May-12 Rops14 16-Apr-12 15-Jun-12 Rops16 Rops19 -7.01 -12.83 -20 Rops32 10 0 -10 30 20

Source: Bloomberg

The Market Call - July 2012

Fixed Income Securities

The longer-end continues to be favored as the Philippines is seen to enjoy a benign inflation outlook.

14
Weakness of the Rupiah has been a problem of late due to the countrys huge oil trade deficit despite the decline in world oil prices. Malaysia: Yields across the curve moved down as inflation continued its downward trend, easing below expectations to bring the 5-month average to 2.6%. The 1-year rate fell 4 bps while the 2-year dropped 6.7 bps. Additionally, the 5-year rated went down 7.8 bps while the 10-year also went down by 3.8 bps. Thailand: Yields dropped progressively higher with longer tenors as the curve went lower than month ago levels due to easing of inflation to a five-month average of 3.03% y-o-y. The 1-year papers were down 1 bps while the 2-year fell by 15 bps. The 5-year dropped 27.9 bps while the 10-year greatly decreased by 32.5 bps. Nevertheless, concerns over rising public debt have been raised as the debt-to-GDP ratio reached 42%. This has raised the possibility of revising the countrys borrowing plans for 2012-2015 during which period the government had planned to borrow 726.46 Baht, 72% of which would be borrowed domestically. Philippines: The yield curve remains to be the steepest in the region despite a 9 bps decrease in the 10-year to 2-year spread from last month. Yields for the 1-year went down 12.2 bps while the 2-year dropped 2.2 bps. The 5-year remained unchanged while the 10-year climbed 6.1 bps. The longer-end continues to be favored as the country is seen to enjoy a benign inflation outlook. This also caused real 10-year yields to reach 2.60%, also the highest in the region.
Figure 14 - ASEAN market +1
8 7 6 5 4 3 2 1 0 1 2 5 10 US Indonesia Thailand PRC Malaysia Philippines

Source: Asian Development Bank (ADB)

Spreads between 10-year and 2-year T-Bonds Country US PRC Indonesia Malaysia Thailand Philippines 2-year rate 0.282 2.40 5.128 3.031 3.16 2.848 10-year rate 1.574 3.41 6.378 3.524 3.492 5.40 Current Inflation Rates 2.10 2.20 4.53 2.60 2.56 2.80 Real 10-year yield -0.526 1.21 1.848 0.924 0.932 2.60 10 year to 2-year Spread (bps) May 18, 2012 143 85 168 46 43 264 June 18, 2012 129 101 125 49 33 255 Spread Change (bps) -14 16 -43 3 -10 -9 Latest Policy Rate 0.25 6 5.75 3 3 4

Source: Asian Development Bank (ADB)

The Market Call - July 2012

Fixed Income Securities

Given the external developments, there is a tendency for yields to ease in the long end.

15 Outlook
While some resolutions were effected by the election of moderates in the Greek elections and Germany appeared ready for some concessions regarding bank bailouts and more pro-growth measures to solve the Eurozone debt problems, there are simply too many details to be ironed between now and the end of the yearthe target when to effect intra-Eurozone agreements. On the other hand, while the U.S. definitely slowed down in Q2, we see a better outlook for H2 with higher public and private spending related to the presidential elections in November 2012. The Eurozone is likely to have fallen into recession in Q2, but may get over it later in H2. Thus, they have resorted to bring down their policy rates further. This will likely trigger a shift again to the U.S. dollar, the Japanese Yen, and other strong currencies. That means slightly lower interest rates in these countries, especially, at the long end of the curve. Domestically, inflation rates have averaged 2.9% in Q2, down from 3.1% in Q1, on the back of falling crude oil prices and good agricultural harvests. This may only be minimally up to 3.0% in Q3 assuming some rebound in crude oil prices, which however will be mild as forecasted by the U.S. Department of Energy. Weak energy demand with the global economic slowdown together with the expected 11% increase in U.S. crude oil production (mostly in H2) and the reduction of its imports will sufficiently offset uncertainties over the sanctions on Iran crude oil exports. NG plans to borrow some P108 B in Q3, which is just about the planned borrowing in 2011-Q3 of P107.5 B as against only P57 B in Q2 since it built up a huge cash pile with the P179 B RTB issue in 2012-Q1. Given the external developments, the easing of expected inflation rates, and small size of NGs intended borrowings (which are probably in the high side, given its below-target spending record) relative to the increased amount of money market funds due to rapidly rising savings, the tendency will be for the yields, especially at the long end to ease. The 4.2% rate on SDAs puts a floor on yields for the shorter-end of the curve.
The Market Call - July 2012

There may be a resurgence of long-term corporate bond and notes issuances in H2 as a result of the lower yields for benchmark bonds, beyond the traditional issuers. As for the latter, they may opt to offer swaps of their more expensive bonds for lower yields that the market is likely to be offering in H2.

Equity Markets

Ghost Month, EU Risks Outweigh Positives

16 In the 2nd quarter of 2012, we saw bullish sentiment zapped by the Eurozones long drawn financial crisis and the weakening economic data in the US and China. The PSEi took back 8.75% (466 points) from its peak in about a month (early May to mid June). The May elections and the inability of Greece to form a government spooked investors as the country risked having to leave the Eurozone. Between May 6 and June 17, Greece held the markets hostage until a new and decisive election was held. During this period, the Philippine equities market experienced selling pressure.
Figure 15 -PSEi Performance
5500 5000 4500 4000 3500 3000 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12
Uncertainty over Greece kept the market hostage.

3rd Quarter Outlook and Strategy

While our medium- to long-term outlook for the Philippine equities market remains constructive, in the next 3 months, odds are high that our market could move lower. From an asset allocation standpoint, we would move to underweight ourselves in equities. We anticipate market disruptions from the political divide in the EU and possibly weak economic data. There is also the phenomenon of fund managers taking their vacations during the quarter as well as the dreaded hungry ghost month in East Asia. Eurozone Political Uncertainty Market participants reacted positively to the outcome of the latest EU Summit (June 28-29, 2012). However, the summit highlighted the uneasy division among European Union leaders. Since the Eurozone debt crisis started, we somewhat felt that EU policymakers would eventually come together and agree on a crisis resolution. Unfortunately, the political landscape has changed. New leaders in France, Italy, Spain, and Greece are keen to challenge Germanys policy stance. In this scenario, outcomes will be more difficult to anticipate. The recent EU Summit was just one of many battlegrounds yet to be seen. What seems apparent is the popular desire of the European middle class to challenge the consensus determined by Europes elite. Economic Perspective While the Philippines is set for another solid 2nd quarter GDP, growth prospects in the worlds biggest economies are scant. The US will likely grow moderately this year but given the soft economic data in the recent months (evident in Citis economic Surprise Index), 2nd quarter GDP report may disappoint on the downside.

Source: Bloomberg

When the outcome of the second election indicated that a Greek exit (Grexit) was not imminent, investors slowly regained confidence in Philippine equities. Philippine Long Distance Company (TEL) led the rally in the last two weeks of June. Investors used the high dividend yield stock as a defensive exposure to the market. Surprisingly, the 1st quarter Philippine Gross Domestic Product (GDP) surged by 6.4% and corporate profits rose by a robust 24%. This helped inspire confidence in the market even attracting investment flows from overseas. Looking into the 3rd quarter, we see a softer Philippine equities market slowed down by headwinds of weak US economic numbers and a long drawn resolution of the EU crisis. Furthermore, we foresee negative seasonality which normally accompanies the quarter.

The Market Call - July 2012

Equity Markets

Robust economic and earnings reports should provide support to the local market.

17
Figure 16 - CITIs Economic Surprise Index
150 100
20

Figure 17 - MSCI Philippines P/E

25

50 0 -50 -100 -150 -200 Jul-06 Sep-07 Nov-08 Jan-10 Mar-11 May-12
5 0 Jan-06 Trailing P/E 5 Year Average Dec-06 Nov-07 Oct-08 Sep-09 Aug-10 Jul-11 Jun-12 Forward 12M P/E 15 10

Source: Bloomberg

Source: Bloomberg

On their side of the Atlantic, Germany which is the brightest spot in Europe appears to be flickering. Given the weakness in high frequency economic data, the Eurozone may have already entered into recession in the 2nd quarter. In Asia, Chinas economy may also have slowed further in the 2nd quarter. Chinese manufacturing, as reflected by the Purchasing Managers Index (PMI), was at its lowest level in seven months. Poor Seasonality The hungry ghost month is just around the corner (August 17 to September 15). Within the quarter, many fund managers in the worlds money centers go for their annual vacation leaves in July and August which coincide with school holidays. The anticipated decrease in market liquidity normally leads to an increase in market volatility which has a dampening effect on stock prices. Nevertheless, given our constructive medium to longterm perspective, we think that any weakness in the market presents an opportunity to slowly accumulate for a year-end rally. While valuations are not very attractive, neither are they too challenging. As of this writing, Morgan Stanley Capital International (MSCI) Philippines Index is fairly valued at 16x forward price-to-earnings (P/E) ratio.

We expect that 2nd quarter earnings results could improve market valuation further. The surprise in 1st quarter GDP will lead to earnings upgrades for most listed companies. Robust economic and earnings reports should provide support to the local market. On a monetary policy standpoint, the Bangko Sentral ng Pilipinas (BSP) has greater flexibility to implement accommodative policies in the coming quarters as compared to last year given the countrys benign inflation outlook.

Quarterly Sectoral Performance

The PSEi was up slightly (+2.72%) in the Q2 of 2012. This quarters record, however, is significantly lower by 14% than Q1s growth. This can be attributed to the continuous drop in share prices in the 1st week of May up to the 2nd week of June. After the Greek elections, the trend reversed and PSEi index is expected to channel upward until early July amidst the robust economic performance. All sectors were in the green except for the Mining and Oil sector. For this quarter, the gains were led by the Holdings sector (+5.77%).

The Market Call - July 2012

Equity Markets

The Energy Secretary had announced a possible increase in electricity rates this August.

18
Quarterly Sectoral Performance
30-Mar-12 Index PSEi Financial Industrial Holdings Property Services Mining and Oil 5,107.73 1,263.83 7,815.83 4,243.85 1,881.71 1,751.93 25,978.59 % Change 4.29% 7.16% 7.89% 7.26% 2.96% -2.21% 1.59% 29-Jun-12 Index 5,246.41 1,304.42 7,839.57 4,488.80 1,927.48 1,759.02 24,629.48 % Change 2.72% 3.21% 0.30% 5.77% 2.43% 0.40% -5.19% Company Meralco Aboitiz Power Energy Development Corp. San Miguel Corporation Jollibee Food Corp. Symbol MER AP EDC SMC JFC 3/30/12 Close 262.00 33.90 6.00 113.70 117.00 6/29/12 Close 253.40 34.15 6.03 114.00 104.20 % Change -3.3% 0.7% 0.5% 0.3% -10.9%

Source of Basic Data: PSE Quotation Reports

Source of Basic Data: PSE Quotation Reports

Financial stocks appeared to be the most affected by the Eurozone woes as they posted just an average of 1% increase for Q2. Last quarters average growth was 25%. Prices of Metrobank (MBT) and Bank of the Philippines Islands (BPI) shares were up (5.9% and 0.8%). MBT and BPI are seen to be doing well after having better-thanexpected net income performance records. The banks loan portfolio expansion is expected to prop-up net incomes. Share prices of both banks followed the downtrend during the Eurozone woes period but backed-up towards the end of the quarter closing in the green. Meanwhile, Banco de Oro (BDO) announced its plans of joining the government in providing funds for stakeholders who are bidding for infrastructure projects. This is said to reduce the banks dependence on consumer loans and support the banks risk buffers by means of loan portfolio diversification. BDO closed in the red after reaching a high of P68.40 in the 2nd week of June.
Company Metrobank Banco de Oro Bank of the Philippine Islands Symbol MBT BDO BPI 3/30/11 Close 87.35 66.20 74.00 6/29/12 Close 92.50 63.40 74.60 % Change 5.9% -4.2% 0.8%

Jollibee Foods Corporation (JFC) posted the highest decline in share prices (-10.9%). JFC is looking at two more acquisitions in China and its top officer believes that the companys performance this year will be better than 2011. Meralco prices also fell by 3.3%, almost the same decrease as last quarter. MERs weight in the MSCI Index will be reduced by around 120 bps reflecting the increased institutional ownership of SMC Global Power in the company. This is said to take effect on the 3rd of September 2012. After having a negative growth in share prices last quarter, Energy Development Corporation (EDC) and San Miguel Corporation (SMC) posted a slight increase of 0.5% and 0.3%, respectively. Last June, SMC announced a monstrous P80 B preferred share offering at a maximum price of P75 each. Aboitiz Power (AP) is still in the green as the company continues to pursue strategic plans for further growth coupled with the high-dividend payout to stockholders. AP reported growth earnings on better generation and distribution revenues. The Energy Secretary announced a possible increase in electricity rates this August. Electricity sales have picked up momentum since last April, which posted double-digit growth.
Company Ayala Corp. Metro Pacific Investments Corp. SM Investments Corp. DMCI Holdings, Inc. Aboitiz Equity Ventures Symbol AC MPI SM DMC AEV 3/30/12 Close 406.60 4.14 660.00 54.00 50.10 6/29/12 Close 469.20 4.17 730.00 56.90 48.95 % Change 15.4% 0.7% 10.6% 5.4% -2.3%

Source of Basic Data: PSE Quotation Reports

Source of Basic Data: PSE Quotation Reports

The Market Call - July 2012

Equity Markets

SCC was a victim of the sharp drop in coal prices as the US energy mix was shifting rapidly towards shale natural gas, which became cheaper and more environmentfriendly.

19
Price gains in the Holding Sector were led by the Ayala Corporation (AC, +15.4%) and the SM Investments Corporation (SM, +10.6%). AC registered a huge increase in price as it reported its above-expectation increase in earnings of 42% to P3.48 B from P2.45 B in the same period last year. Increases in the property, banking, and water services subsidiaries were seen to boost Ayalas earnings. Likewise, SM stocks recorded an increase of 10.6% to P730, the highest close in June. SM had reported an increase in net income, which was primarily driven by the increase in the number of stores. Retaiuhjl revenue accounted for 60% of the companys income. SM is set to build two hotels in the near term worth P5 B. Among the top companies included in this sector, only the Aboitiz Equity Ventures (AEV) posted a decrease in price.
Company Ayala Land, Inc. SM Development Corp. SM Prime Holdings, Inc. Robinsons Land Corporation Megaworld Corp. Symbol ALI SMDC SMPH RLC MEG 3/30/12 Close 20.75 6.62 16.90 16.50 1.96 6/29/12 Close 21.60 6.15 13.02 17.42 2.19 % Change 4.1% -7.1% -23.0% 5.6% 11.7% Company Philex Mining Corporation Semirara Mining Corp. Lepanto Consolidated Mining Co. Symbol PX SCC LC Company Philippine Long Distance Tel. Co. Globe Telecom Symbol TEL GLO 3/30/12 Close 2,700.00 1,134.00 6/29/12 Close 2,650.00 1,115.00 % Change -1.9% -1.7%

Source of Basic Data: PSE Quotation Reports

The Service sector improved minimally by 0.40% with the top companies being in the red. The prices of Philippine Long Distance Telephone Co. (TEL) and Globe Telecom (GLO) had trended consistently downward since April, but recovered in mid-June as investors were attracted by their high dividend yields. To date, TEL and GLO posted a negative growth of 1.9% and 1.7%, respectively. TELs core income for the first quarter of 2012 fell by 12% due to high tax provisions and lower equity share in MERs earnings. Meanwhile, GLO reported higher operating expenses outpacing their revenue gains. Heightened competition in the industry remains to be a challenge for both.
3/30/12 Close 21.15 244.80 1.49 6/29/12 Close 23.85 218.20 1.39 % Change 12.8% -10.9% -6.7%

Source of Basic Data: PSE Quotation Reports

Source of Basic Data: PSE Quotation Reports

The Property sector was up by 2.43%, slightly lower than Q1. The sectors gain was mostly led by Megaworld (MEG) which posted double-digit earnings growth (+11.7%). Aside from an increase in real estate sales and rental income, MEG has been able to improve its net income as a result of a reduction in its cost of goods sold ratio. Robinsons Land Corporation (RLC) was also up by 5.6% due to the completion and expansion of several projects in Metro Manila. Ayala Land Inc. (ALI) also posted an increase in its share prices on the back of strong real estate sales and leasing revenues. ALI recently launched its biggest investment to date worth P30 B in Bonifacio Global City. In addition, ALI is building its presence globally with the opening of new marketing and customer service office in the United States. The Property sector is believed to continue its positive performance in the face of increased OFW remittances.

While most of the companies share prices were down, outstanding performance was seen with the Philex Mining Corporation (PX) which had a 13% increase since Q1. Last June 15, PX had the biggest advance of 5.3% to P23.70. Improvement in PX performance may be due to better output and price expectations as Q1 output was fairly depressed. Semirara Mining Corporation (SCC) and Lepanto Consolidated Mining Co. (LC) posted declines in share prices, which were basically due to a decrease in gold and coal prices especially in the month of May. SCC was a victim of the sharp drop in coal prices as the US energy mix was shifting rapidly towards shale natural gas, which became cheaper and more environment-friendly. LC had reached a low of P1.19/share on May 16th, but recovered to present levels by June. Trading volumes in the second half were very small. Investors continue to await developments on the Financial or Technical Assistance Agreement (FTAA) likely to be out by H2.

The Market Call - July 2012

Equity Markets

Lower trading volume was the norm in the month of June, a result of the crisis in the Eurozone

20
Quarterly Turnover (in millions)
Total Turnover Sector Financial Industrial Holdings Property Services Mining and Oil Total Foreign Buying Foreign Selling Value 60,289.2 132,721.2 104,989.2 52,983.6 59,064.2 35,614.0 441,488.9 231,593.7 179,350.9 % Change -19.7% 15.7% -2.1% -9.6% -25.1% -47.7% -12.2% 11.7% -5.9% Average Daily Turnover Value 1,004.82 2,212.02 1,749.82 883.06 984.40 593.57 7,358.15 3,859.89 2,989.18 % Change -14.3% 23.4% 4.4% -3.5% -20.2% -44.2% -6.3% 19.2% 0.4%

Source of Basic Data: PSE Quotation Reports

Total turnover of the Philippine bourse was down by 12% from the previous quarter. Only the Financial sector posted a positive turnover. Consistent with the decline in share prices, the Mining and Oil sector posted the highest decline in the average daily turnover (-44.2%). Lower trading volume was the norm in the month of June, a result of the crisis in the Eurozone. Foreigners, however, ramped up purchases, lifting their net buying to P52.2 B from Q1s P16.5 B.

The Market Call - July 2012

Recent Economic Indicators

21 NATIONAL INCOME ACCOUNTS, CONSTANT PRICES (in P millions)
2010 Levels Production Agri, Hunting, Forestry and Fishing Industry Sector Service Sector Expenditure Household Final Consumption Government Final Consumption Capital Formation Exports Imports GDP NPI GNI 663,744 1,666,601 2,966,895 Growth Rate -0.7% -1.9% 3.4% 2011 Levels 662,665 1,859,515 3,179,358 Growth Rate -0.2% 11.6% 7.2% 4th Quarter 2011 Quarterly Annual Levels G.R. G.R. 196 509 886 28.6% 308.9%
3088.2%

1st Quarter 2012 Quarterly Annual Levels G.R. G.R. 172 479 836 -12.0% -5.9% -5.7% 1.0% 4.9% 8.5%

-2.5% 2.5% 5.9%

3,817,908 548,297 899,333 2,385,812 2,354,109 5,297,240 1,691,527 6,988,767

2.3% 10.9% -8.7% -7.8% -8.1% 1.1% 25.0% 6.1%

3,945,827 570,208 1,183,650 2,886,133 2,884,280 5,701,539 1,859,847 7,561,386

3.4% 4.0% 31.6% 21.0% 22.5% 7.6% 10.0% 8.2%

1198 124 389 572 708 1591 473 2064

21.7% -9.8% 26.4% -22.2% -4.8% 11.3% 8.3% 10.6%

6.7% 5.8% -4.3% -5.5% -3.3% 3.7% 2.9% 3.5%

1043 164 256 746 707 1487 394 1624

-13.0% 32.0% -34.3% 30.4% -0.2% -6.5% -16.7% -21.3%

6.6% 24.0% -23.5% 7.9% -2.6% 6.4% -17.1% -13.2%

Source: National Statistical Coordination Board (NSCB)

NATIONAL GOVERNMENT CASH OPERATION (in P millions)

2010 Levels Revenues Tax BIR BoC Others Non-Tax Expenditures Allotment to LGUs Interest Payments Others Overall Surplus (or Deficit) 1,207,926 1,093,643 822,623 259,241 11,779 113,877 1,522,384 279,552 294,244 Growth Rate 7.5% 11.4% 9.6% 17.7% 6.8% -19.5% 7.1% 5.6% 5.5% Levels 1,359,942 1,102,055 924,146 265,108 12,801 157,612 1,557,696 315,114 279,041 2011 Growth Rate 12.6% 0.8% 12.3% 2.3% 8.7% 38.4% 2.3% 12.7% -5.2% Levels 153,268 142,354 116,021 25,367 966 10,913 122,244 23,254 16,138 Apr-12 Monthly G.R. 32.8% 39.8% 54.3% 1.0% -36.1% -19.8% -15.1% -0.8% -41.6% Annual G.R 10.8% 12.3% 12.2% 13.0% -1.80% -5.5% 9.1% -4.9% 41.2% Levels 131,403 120,922 94,551 25,230 1,141 10,463 151,304 28,550 16,362 May-12 Monthly G.R. Annual G.R -14.3% -15.1% -18.5% -0.5% 18.1% -4.1% 23.8% 22.8% 1.4% 9.4% 8.9% 7.3% 15.5% 3.8% 16.2% 16.7% 0.2% 4.6%

-314,458

5.33%

-197,754

-37.11%

31,024

191.2%

-218.0%

(19,901)

-164.1%

107.3%

Source: Bureau of the Treasury (BTr)

POWER SALES AND PRODUCTION INDICATORS Manila Electric Company Sales (in gigawatt-hours)
2011 Annual Levels TOTAL Residential Commercial Industrial 30,314 9,382 11,887 8,948 Growth Rate 1.1% -1.6% 1.7% 3.9% Levels 2,659 834 1019 795 Apr-12 Growth Rate 8.3% 8.6% 6.1% 11.1% YTD 9.5% 8.7% 7.9% 12.8% Levels 2,874 919 1085 860 May-12 Growth Rate 11.8% 8.7% 8.9% 19.7% YTD 10.0% 8.7% 8.1% 14.2%

Source: MERALCO

The Market Call - July 2012

22 BALANCE OF PAYMENTS (in US millions)

2010 Levels I. CURRENT ACCOUNT Balance of Trade Balance of Goods Exports of Goods Import of Goods Balance of Services Exports of Services Import of Services Current Transfers & Others II. CAPITAL AND FINANCIAL ACCOUNT Capital Account Financial Account Direct Investments Portfolio Investments Financial Derivatives Other Investments III. NET UNCLASSIFIED ITEMS OVERALL BOP POSITION Use of Fund Credits Short-Term Memo Items Change in Commercial Banks Net Foreign Assets Basic Balance Net Unclassified Items as percentage of Total Trade 8465 -8438 -10384 50684 61068 1946 13243 11297 16595 7948 98 7850 1226 4018 -191 2797 -2010 14403 0 -2 Growth Rate -9.5% 25.4% 34.8% 31.5% -7.9% 20.2% 26.9% 1.9% -588.5% -5.8% -553.5% -23.6% -742.9% -696.9% -202.0% 53.4% 124.3% 0.0% -99.9% Levels 7078 -11857 -15450 62681 74538 3593 15450 11857 17642 5228 171 5057 1253 5524 1002 -2722 -2127 10179 0 -1 2011 Growth Rate -20.7% -44.1% -40.9% -3.3% 2.0% 31.4% 9.6% 4.4% 6.0% -29.2% 74.5% -30.6% 83.7% 26.6% 624.6% -211.8% 6.2% -28.9% 0.0% 0.0% 4th Quarter 2011 Levels 1808 -3711 -4681 14739 18450 970 4092 3122 4767 -981 51 -1032 461 -71 88 -1510 -369 458 0 -11 Annual G. R. -15.0% -6.1% -39.5% -10.6% -4.5% 86.2% 15.9% 3.7% 7.2% -118.3% 240.0% -119.3% 14.4% -102.0% 1357.1% -205.1% 6.2% -94.2% 0.0% 8.3% 1st Quarter 2012 Levels 882 -2924 -3995 12682 16677 1071 4144 3073 4062 962 41 921 696 1302 59 -1136 -601 1243 0 10 Annual G. R. -8.1% 0.9% -2.2% 5.5% 4.7% 12.0% 9.0% 7.9% 1.3% -73.7% 28.1% -74.6% 71.4% -51.3% -93.4% -223.6% --64.4% 0.0% 0.0%

4932 11605 -1.8

-231.4% -3.6% 12.5%

5622 8655 -1.9

11.7% -25.5% 5.6%

836 1807 -1.4

-74.3% -51.4% -2.1%

-656 1021 -2

-123.2% -52.9% --

Source: Bangko Sentral ng Pilipinas (BSP)

MONEY SUPPLY (in P millions)

2011 Average Levels Growth Rate RESERVE MONEY Sources: Net Foreign Asset of the BSP Net Domestic Asset of the BSP MONEY SUPPLY MEASURES AND COMPONENTS Money Supply-1 Money Supply-2 MONEY MULTIPLIER (M2/RM) 1,094,789 8.3% Levels 1,256,491 Mar-12 Annual G.R. 18.8% Apr-12 Levels 1,275,353 Annual G.R. 18.7%

3,037,248 -1,942,459

33.6% -254.0%

3,249,982 (1,993,491)

14.3% 11.6%

3,213,751 (1,938,398)

10.3% 5.4%

1,352,963 4,228,864 3.9

9.6% 8.6% 1.0%

1,470,137 4,446,449 3.54

11.5% 5.8% -10.9%

1,444,815 4,483,131 3.52

7.9% 9.0% -8.1%

Source: Bangko Sentral ng Pilipinas (BSP)

The Market Call - July 2012

Equity Markets

23

The Market Call - July 2012

The Market Call - Capital Markets Research

July 2012

CONTRIBUTORS
Roberto Juanchito T. Dispo Dr. Victor A. Abola Viory Yvonne T. Janeo Gregorio A. Mabbagu Erica Myra P. Yap Reuben Mark A. Angeles Augusto M. Cosio, Jr. President, FMIC Senior Economist, UA&P Research Associate, UA&P Research Assistant, UA&P Research Assistant, UA&P Department Head Research, FMSBC President, FAMI

Views expressed in this newsletter are solely the responsibilities of the authors and do not represent any position held by the FMIC and UA&P.

FMIC and UA&P Capital Markets Research