Philippines Strategy:When in doubt on politics,best to focus on corporate earnings

Event.

With just 20 days remaining before the 2016 presidential elections this May 9,we find the race to be as unclear as ever. Aspirants have been switchingplaces at the top spot, which ultimately leads to a strong likelihood of a veryclosely contested election.

With this political uncertainty still lingering, we thus think it is best to focus oncorporate earnings. The long drawn-out Philippine market results season for4Q15 has finally concluded (reporting deadline of April 15) on a generallypositive note, and our expectation is for this to continue improvement into1Q16 results season.

Impact.

Inexorable path towards a very close presidential race. With three of thefour leading candidates gaining possession of the top rank since the start of2015, the one conclusion that can be made with just 20 days to go until May 9is that the election is set to be a very tight race. This was best exemplifiedwhen the most recent front runner Duterte is now poised to take a hit in hispopularity after derogatory comments he made related to a 1989 abductionand rape at a campaign rally over the weekend. All told, this sets the stage fora very closely contested election and brings back scenarios similar toprevious elections of 1992 and 2004. These were years with very closeelection winners, but the preferred outcome would be1992, where overallpresidential execution was at its best despite the narrow winning margin.

Presidential election a non-event from a macro and earningsperspective. With the great uncertainty on the winner of the elections, it isquite fortunate that this in itself would likely not have a great bearing on themacro and earnings situation of the Philippines. Aside from each candidateoffering little differentiation in term of their respective platforms, country macrohas made great strides through the years and thus is now considered as veryresilient with steady remittances and a very strong fiscal position standing out.

Focus on earnings instead. We thus believe that it is best looking at acountry feature offering a more definitive and exact measure: corporateearnings. After a good end to 2015, we expect improvement this coming 1Q16results season. We regard this quarter to set the tone on the achievability ofour 2016 Philippines market EPS growth of 11%, which is quite broad-basedand not heavily dependent on particular sector.

Outlook.

Our view on the Philippines continues to be optimistic, premised on corporateearnings growth staying intact and an election exercise proving to be a netpositive despite having limited macro and earnings impact. We are overweighton the country from a regional strategy perspective and our preferred picksare MEG, RRHI, PGOLD, MER, MBT, SMPH, MPI, and AC, in that order.