During our last briefing, we said that

• We remain positive on the market’s long term view• However, it could take a while for the market to

resume its uptrend due to numerous challenges in the short term

Unfortunately, CHALLENGES remain

Earnings performance continues to disappoint

Period Above Inline BelowMedian '15E EPS growth

1Q 19.0% 41.4% 39.7% 17.1%

2Q 23.2% 37.5% 39.3% 8.8%

3Q 23.2% 42.9% 33.9% 7.5%

Source: COL Estimates

Actual earnings vs. estimates

China continues to weaken

GDP growth Manufacturing PMI

6.8%

4

6

8

10

12

14

16

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

49.7

35

40

45

50

55

60

65

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source: Bloomberg

5U.S. Fed maintains its divergent monetary policy

125 bps1-year lending & deposit rate cut 5X by 125 bpsRRR cut by a total of 200 bps to 17.5%

DECEMBER 201525 bps rate hike

DECEMBER 2015Deposit rate cut 10 bps, bond purchase extended6 mos.

2016Four potential rate hikes of 25bps each

Leading to a strong USD & falling commodity prices

US dollar Commodity prices (CRB Index)

70

75

80

85

90

95

100

105

2010 2011 2012 2013 2014 2015300

350

400

450

500

550

600

2010 2011 2012 2013 2014 2015

+35.7%

-35.0%

Source: Bloomberg

7Hurting several developing economies

Commodity dependency (net exports, % of GDP)

USA

USA

Greenland

Canada

S America

Europe

Middle EastAfrica

Russia

Kazakhstan

China

India

Australia

NZ

Philippines

Why commodity prices matter (to developing economies)

Source: UNCTAD, Bloomberg

+57%

71%

85%

-35%

-74%

Value of commodity

exports (‘09-’10 to ‘12-’13)

% of developing countries that derive >60% of export from

commodities% of least developed countries that derive >60% of exports from

commodities

Average drop in commodity

prices since ‘11

Drop in oil prices since ‘11

Countries with high commodity dependence & current account deficits are most vulnerable

Measures of vulnerabilityDeveloping Market

Commodity Net Export* (% GDP) CA/GDP**

Brazil 3.8% -4.2%Russia 18.0% 3.1%India -7.9% -1.4%China -7.0% 2.1%Mexico 1.9% -2.1%South Africa 1.5% -5.4%Turkey -3.5% -5.7%Indonesia 5.7% -3.0%Malaysia 7.0% 7.1%Philippines -4.8% 4.4%Thailand -6.0% 3.5%

*2012-13**2014Source: UNCTAD, IMF (for Russia only), COL estimates

Although more resilient, Philippines is showing signs of vulnerability

OFW remittances growthMonth 2009 2015January 0.1% 0.5%February 4.9% 4.2%March 3.1% 11.3%April 2.2% 5.1%May 3.7% 5.8%June 3.3% 6.1%July 9.3% 0.5%August 2.8% -0.6%September 8.6% 4.3%October 6.7% 0.2%November 11.3%December 11.4%Peso Depreciation 15.0% 4.6%

Deceleration of OFW remittances growth can not be solely explained by weaker peso

Source: BSP

Major threat from significant exposure to Middle East

Source: POEA, BSP, UNCTAD

2.4 Mil

61%

23%

10%

24%

OFWs deployed in ‘14

(1.9 Mil land based)

% of deployed land based OFWs going to

the Middle East

Share of OFW remittances from the

Middle East

CA/GDP of Saudi Arabia (‘14)

Commodity net export of Saudi

Arabia (%GDP, ‘13)

Saudi Arabia abandons its currency peg

Peso is weakening . . .

Peso exchange rate

40.581

47.78

40

41

42

43

44

45

46

47

48

2011 2012 2013 2014 2015

Source: Bloomberg

6.21

6.58

6.00

6.10

6.20

6.30

6.40

6.50

6.60

6.70

Jan-

15

Feb-

15

Mar

-15

Apr-

15

May

-15

Jun-

15

Jul-1

5

Aug-

15

Sep-

15

Oct

-15

Nov

-15

Dec-

15

Jan-

16

Brought about by internal & external factors4.

61.

25.

44.

12.

8 4.3

7.3

14.5

7.2

3.3

10.0

0.7 2.

20.

17.

44.

72.

41.

5 1.9

1.7

-7.0

0.5 1.0

0.7 1.3

1.1

0.2

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

1Q09

3Q09

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

Chinese yuanBoP/GDP (%)

Source: Bloomberg, BSP

Interest rates rising

Factors pushing up rates• Anticipation of Fed rate hike• Weaker peso• Uncertainty on how the

interest rate corridor will be implemented

Philippines 10-year bond rate

4.42%

2.50

3.00

3.50

4.00

4.50

5.00

2013 2014 2015 2016

Source: Bloomberg

Weak peso, rising rates not good for stock market

Peso vs PSEi 10-year bond rates

40

42

44

46

48

50

52

54

1000

2000

3000

4000

5000

6000

7000

8000

9000

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

PSEi Php:US$

2

4

6

8

10

12

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Bloomberg

Elections also hurting sentiment

Source: Pulse Asia Nov 2015 presidential candidate preference survey results

34% 26% 22% 11%

The major correction is now threatening to become a bear market

• PSEi now down 23% from the peak

• Abundance of challenges making it difficult to fight contagion

PSEi & other ASEAN markets

70

75

80

85

90

95

100

105

110

2015 2015 2015 2015 2015 2015 2015 2015 2015 2016

Philippines Indonesia Thailand Malaysia

Source: Bloomberg

An opportunity to participate in the Philippines’ attractive LT fundamentals at bargain prices

Only a “cyclical bear” in a “secular bull” • Strength of BPO sector to help offset weakness of OFW

remittances

• Weaker peso is good for the economy

• Consumer sector has been resilient regardless of the president

• Magnitude of rate hikes not expected to be significant

• Listed companies remain fundamentally strong

• Market’s valuation starting to look attractive

Strength of the BPO sector to help offset weakness of OFW remittances

Combined OFW remittances & BPO revenues can still grow by 8.3% in 2016E and 7.8% in 2017E

18,7

63

20,1

17

21,3

91

22,9

84

24,3

48

24,7

68

24,7

68

24,7

68

10,0

58

12,0

74

13,4

50

15,3

05

18,9

00

21,2

00

25,0

00

28,9

00

0

10,000

20,000

30,000

40,000

50,000

60,000

2010 2011 2012 2013 2014 2015E 2016E 2017E

OFW Remittances BPO Revs

OFW remittances & BPO revenues

Source: BSP, IBPAP, COL Estimates

Weak peso is good for the economy

• Boost the value of OFW remittances

• Equivalent to 11.8% of consumer spending

• OFW remittances increased by 185% in dollar terms but only 126% in peso terms the last 10 years

• Make exports and the BPO sector more competitive

OFW remittances (US$ & Php)

+185%

+126%

OFW Remittances (US$) OFW Remittances (Php)

Source: BSP, COL Estimates

Consumer spending has been resilient regardless of the president

Consumer spending growth under different administrations

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Cory AquinoAve:4.2%

Ramos Ave:3.6%

Estrada Ave:4.5%

Arroyo Ave:4.3%

PNoyAve:5.3%

Thanks to several favorable LT factors

Magnitude of rate hikes not expected to be significant

ISM manufacturing PMI (U.S.)

48.2

30

35

40

45

50

55

60

2008 2009 2010 2011 2012 2013 2014 2015Source: Bloomberg

Magnitude of rate hikes not expected to be significant

Banks loans to deposit ratio Government debt/GDP

68.1

60

62

64

66

68

70

72

74

45.4

40

45

50

55

60

65

Source: Bloomberg

Listed companies remain fundamentally strong

• Most leveraged companies have defensive businesses

• Minimal unhedged US dollar debt exposure

Net D/E ≥ 0.9 Unhedged US$ Debt (US$Mil)

% of total debtCompany Net D/E

CEB 1.3 700 100.0%BLOOM 1.0 - -MCP 1.0 - -EDC 1.1 262 23.4%FGEN 1.0 - -TEL 1.1 - -GLO 0.9 - -

Sensitivity to higher rates & weak peso

Source: COL estimates

Valuations starting to look attractive

• At 6,259, PSEi trading at 15.6X 2016E P/E, below the 5-year historical average of 16.5X P/E

• PSEi no longer trading at a premium relative to other ASEAN markets despite its strong LT fundamentals

Valuation of regional markets

Source: Bloomberg, COL estimates

Conundrum of investing during a bear market

“Be fearful when others are greedy and greedy when others are fearful”- Warren Buffett

“ The market can stay irrational longer than you can stay solvent”- John Maynard Keynes

Conundrum of investing during a bear market

Objective: Employ a strategy to capitalize on the OPPORTUNITY but manage the RISKS

Opportunity

• Significant gains

Risks

• Steep decline

• Long duration

• Nobody knows the

bottom

Recommended strategy

1. Invest only LT money – Bear markets take long to finish.

2. Don’t use margin – Using margin exposes you to the risk of a margin call, which in turn forces you to sell at a low price.

3. Spread out your buying – Nobody knows when or where the bottom will be. Deploy your capital using peso cost averaging over 18 months to improve your average cost.

4. Set conservative buying prices – Remember it’s a buyer’s market. There’s no need to be aggressive.

Anatomy of a bear market

Bear Markets

Peak to trough

Duration

GlobalHistoricalAverage*

55.9%

40 months

Shortest & Shallowest**

22.5%

5 months

Longest & Deepest**

84.8%

153 months

Sources: *“This time it’s different” by Reinhart & Rogoff**Greenbakd.com

Anatomy of a bear market

Bear Markets

Peak to trough

Date

Duration

GlobalHistoricalAverage

55.9%

NA

40 months

Asian Financial

Crisis

71.6%

2/97-10/01

56 months

Global Financial

Crisis

56.8%

10/07- 10/08

12 months

Today

22.6%

4/15 to ?

9 months

Source: “This time it’s different” by Reinhart & Rogoff, COL estimates

Recommended strategy

5. Be defensive - We recommend buying a basket of more defensive companies that have strong balance sheets. You can also choose to buy an index fund which is automatically diversified and less volatile, or you can combine an index fund with a few stock picks.

Stock picks

Power Sector

FGEN (Php18.24, FV: Php32.70)

• Engaged in the defensive business of power generation

• 93% of revenues derived from long term contract agreements

• Although it has US$394 Mil worth of debts, its revenues are in dollars providing it with a natural hedge

• Profits are forecast to grow by 22% this year

• Trading at only 10.4X 16P/E, while providing a dividend yield of 2.9%

Stock picks

Property Sector

ALI (Php27.95, FV: Php41.67)

• One of the largest property companies in the country with a diversified source of revenues and project locations

• Leasing businesses account for 35% of EBIT

• Highly manageable net D/E of 0.84X as of 9M15, while 85% of borrowings have fixed rates

• Already trading at 33.6% discount to NAV, wider than its historical average discount of 25%

Stock picks

Property Sector

MEG (Php3.17, FV: Php5.58)

• One of the largest property companies in the country

• Due to significant expansion, leasing businesses now account for 43% of EBIT

• Very conservative net D/E of 0.07X

• Now trading at 57.5% discount to NAV, already close to 1 STDV below its historical average discount of 59.2%, and only 9.1X 16E P/E

Stock picks

Property Sector

SMPH (Php19.18, FV: Php21.70)

• Most defensive property company in the Philippines deriving 78.6% of EBT from rental income, predominantly from malls which is the most resilient

• Net D/E is only 0.47X

• Buy below Php18.90 which is its based on its historical average P/E of 23.2X.

Stock picks

Property Sector

RLC (Php23.05, FV: Php29.60)

• Also a highly defensive property company in the Philippines deriving 77% of EBIT from rental income

• Net D/E is only 0.38X• Already trading at 33.8%

discount to its NAV

Stock picks

Consumer Sector

DNL (Php7.10, FV: Php8.30)

• A defensive company as most of its products are sold to manufacturers of non-discretionary consumer goods

• Focused on specialized products which minimizes competition and improves its pricing power

• Net D/E is only 0.24X, 28X interest cover

• Currently trading at 18.7X 16E P/E, below the consumer sector average of 23.5X

Stock picks

Consumer Sector

CNPF (Php15.12, FV: Php21.50)

• Main businesses (fish and meat) which account for 70% of revenues are highly defensive and where it is the market leader

• EPS to increase by a CAGR of 25.2% during the next two years largely due to the acquisition of the coconut business

• Net D/E is only 0.05X, 45X interest cover

• Currently trading at only 12.7X 16E P/E, well below the consumer sector average of 23.5X, despite its above average growth outlook

Summary of stock picks

Stock picks

Sector Stock Price FV Buy Below Price

High Conviction Buy Price

Power FGEN 18.24 32.70 28.40 16.50

Properties*

SMPH 19.18 21.70 18.90 12.22ALI 27.95 41.67 36.20 24.00

MEG 3.17 5.58 4.70 3.05RLC 23.05 29.60 25.70 19.50

Consumer DNL 7.10 8.30 7.20 6.60CNPF** 15.12 21.50 17.20 14.28

*Limit to only a maximum of 30% of portfolio**Limit exposure to 5% of portfolio due to illiquid nature of stock

Summary of stock picks

Index Fund

Ticker Current Level

Buy Below Price

High Conviction Buy Price

PSEi 6,135.38 6,400.00 5,600.00Equity FundThe PhilequityPSE Index Fund XPEIF 4.091 4.262 3.729

Recommended strategy

5. Be defensive - We recommend buying a basket of more defensive companies that have strong balance sheets. You can also choose to buy an index fund which is automatically diversified and less volatile, or you can combine an index fund with a few stock picks.

6. Be mentally prepared to see losses in the short term – This is normal while the market is trending lower.

Rewards for staying invested even during difficult times

S&P 500 20 year average annual return (1994-2013)

Source: Davis Advisors

9.20%

5.50%

0.90%

-4.40%

-8.60%-10.00%-8.00%-6.00%-4.00%-2.00%0.00%2.00%4.00%6.00%8.00%

10.00%12.00%

Stayed thecourse

Missed best10 days

Missed best30 days

Missed best60 days

Missed best90 days

44

45