By Arra B. Francia
Senior Reporter

BPI SECURITIES, Inc. sees up to $600 million worth of foreign funds exiting the local stock market this year as more investors place their funds in China, following its greater weighting on the MSCI index.

BPI Securities President and Chief Executive Officer Hermenegildo Z. Narvaez explained that about $1.9 trillion worth of funds track the MSCI Emerging Market index, influencing their decisions on where to park their funds.

“The MSCI emerging market index, which a lot of fund managers track, has decided to increase the weighting of China, and as a result smaller emerging markets like the Philippines will be impacted,” Mr. Narvaez told BusinessWorld in a recent interview.

“So expect a lot of outflows. Our expectation is we’re looking at about anywhere between $400-600 million of outflows on the back of this,” he added.

The MSCI during its May 2019 semi-annual index review decided to increase the weight of China stocks in three steps until November. China’s position in the MSCI Emerging Market index could then increase to 42% of its market cap, including Hong Kong-listed shares.

“We account for about 1.1% of that Emerging Market index…Even though we’re only 1% of the Emerging Market index, it’s still a significant figure — $400-600 million accounts for more than a month’s worth of trading in the index,” Mr. Narvaez said.

BPI Securities’ top executive added that regional peers such as Indonesia and Thailand will also be affected by the rebalancing.

Sought for comment, Philippine Stock Exchange, Inc. President and Chief Executive Officer Ramon S. Monzon noted that the MSCI review is a regular event expected by the market.

“(W)hile its results may spark buying or selling, this action happens within a specific time frame. After that, foreign investors factor in developments that may impact their investment strategy. Foreigners are still net buyers of our market as of today,” Mr. Monzon said in an e-mail last week.

To date, the PSEi has a net foreign yield of P28.24 billion, according to online stock market platform Investagrams.

He added that the Philippine market is still attractive to foreign investors given upbeat prospects on the country’s economy.

“Sentiment on the Philippines continues to be positive particularly with recent developments including the upgraded credit rating by S&P, the affirmed credit rating by Fitch Ratings and the improvement of the country’s competitive ranking based on the International Institute for Management Development’s report.”

Taking into account the MSCI rebalancing, BPI Securities is projecting the PSEi to finish at the 8,650 level by the end of 2019. This is 2.8% lower than its earlier forecast of 8,900 disclosed last year.

The market could further be affected by negative sentiment on the US-China trade war, as two of the world’s largest economies continue to impose tariff increases without much progress on a much awaited trade deal.

Mr. Narvaez said that while the Philippines will not be heavily affected by the trade war, general sentiment will affect investor’s appetite.

“The problem is the stock market is not just a function of fundamentals but sentiment, and how asset prices behave and the risk appetite of investors. Because of this trade war, there’s a general aversion to risk,” Mr. Narvaez explained.

There will then be a tendency for investors to start investing in what is perceived as safer assets.

“In the near term, probably more money is going to be taken away. Some movements in safer assets such as the yen, the dollar, short term US Treasuries, and even gold for example.”

Asked what sectors seem more attractive for investors, Mr. Narvaez listed down banking stocks, which he noted will benefit from the recent reserve requirement ratio cut. He also added property and some consumer stocks.