Will The Philippine Economy Continue To Surge Higher?

A very good introductory look at the Philippine economy if you have considered investing there. I have spent quite a lot of time there over the last few years as I own a business in the country. The question is, will its 7.2% growth continue well into the future?

To be honest with you, I have some doubts. Here is why. The biggest short-term term test for the country will have nothing to do with it’s overall economy and everything to do the US Capital Markets.

As you know, our mathematical and timing work predicts a severe recession and a bear market in the US between 2014-2017. The Philippine economy and it’s markets tend to follow. In this case, if the Philippines Stock Exchange PSEi Index breaks below 5,600….there will be hell to pay. Basically, there is no support (at all) until it drops about 60-80%.

This suggests that if the Philippine stock market doesn’t decouple from the US stock market when the bear market starts and follows it lower, the end of the Philippine “miracle growth” is just around the corner….unfortunately, as I love that country and its people. 

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Philippine Stock Market Is Surging. Should You Invest?

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With the Philippine stock index surging higher over the last few months and with large funds increasing capital allocation, the question is……should you invest in this fast growing emerging market?

The answer might surprise you. 

NO. The Philippine stock market is more or less reliant/follows the US Market. As soon as the US bear market takes control (2014-2017) and breaks down, I would expect the Philippine stock index to do the same. With one major difference. Since this is an emerging market with a highly speculative banking sector I would expect it’s decline to be much, much worse. How bad? If the PSEI Index breaks below 5,500 there is nothing stopping it (technically) until it gets to about 1,000. As such, if the PSEI breaks as anticipated, it turns into a wonderful shorting opportunity.

Please do your own research and make your own investment decisions.  

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Philippine Stock Market Is Surging. Should You Invest?  Google

Top Philippine Fund Doubles Consumer Stocks With Record Bet

The top-performing Philippine stock fund in the past five years has doubled holdings of consumer companies as record remittances boost the spending power of shoppers in Southeast Asia’s fastest-growing economy.

The UBP Large Cap Philippine Equity Portfolio (IFDLCPE)increased positions in the consumer industry to a record 60 percent of assets from about 30 percent in mid-2013, said Robert Ramos, who oversees about $897 million as the chief investment officer at Union Bank of the Philippines. Holdings include Emperador Inc. (EMP), the nation’s largest liquor company, and Puregold Price Club Inc., the biggest grocery-store operator. Both stocks have jumped at least 12 percent this year.

Overseas remittances to the Philippines increased a bigger-than-estimated 9.1 percent in December, while slower inflation last month eased pressure on the central bank to raise interest rates that have stayed at a record low since October 2012. Consumer spending accounts for almost three quarters of the $250 billion economy, which grew at a 6.5 percent pace last quarter.

“Everywhere you go, people say the economy is better and that global Filipinos are richer and have higher disposable income,” Ramos, 38, whose UBP Large Cap fund returned an annualized 46 percent in the past five years, the most among 28 Philippine stock funds tracked by Bloomberg, said in an interview in Manila on March 4. “I expect more gains from the sector.”

Earnings Jump

Overseas Filipinos sent home a record $2.16 billion in December, bringing the 2013 tally to an all-time high of $22.8 billion, data from Bangko Sentral ng Pilipinas show. The central bank forecast remittance growth of 5 percent this year.

The cash inflows, which make up about 10 percent of the economy, have helped companies such as Emperador and Puregold (PGOLD) post record earnings. Profit at Emperador, the UBP Large Cap fund’s biggest holding, rose to an all-time high of 5.8 billion pesos ($130 million) in 2013.

Ramos shifted the $67 million UBP Large Cap fund’s strategy in the middle of 2013 to shield it from volatility after the U.S. Federal Reserve signaled stimulus cuts. He sold financial, energy and property shares, deterred by regulatory headwinds and rising valuations.

“We wanted stocks that will outperform but at the same time won’t be very erratic,” Ramos said.

Valuation Risk

Consumer companies also stand to benefit as the Philippine currency’s slide against the dollar boosts the value of remittances, Ramos said. The peso has weakened more than 8 percent since May 22, when the Fed signaled it would trim its monthly bond purchases as the economy improves.

“Families of overseas Filipinos feel richer because the peso has devalued,” Ramos said. “They are probably spending a little more than before.”

The Philippine Stock Exchange Index (PCOMP) fell 0.1 percent to 6,508.58 as of 12:32 p.m. in Manila.

Consumer stocks are growing more expensive and the companies are unlikely to match the growth they enjoyed last year, when campaign spending in congressional and local elections boosted demand, according to COL Financial Group Inc.

Puregold is valued at about 25 times estimated 12-month earnings, while Emperador trades at 24 times, according to data compiled by Bloomberg. That compares with a multiple of 17.5 for the Philippine Stock Exchange Index, which has climbed 11 percent this year.

Growth Outlook

“I am less certain that growth will be as fast,” said Jed Pilarca, an analyst at COL Financial. “Consumer stocks aren’t cheap. It might be time for a correction.”

Emperador’s net income will probably increase 24 percent this year, while Puregold’s profit may climb 28 percent, according to analysts’ estimates compiled by Bloomberg. The nation’s economicgrowth is set to exceed 6.5 percent in the first quarter, boosted by rebuilding after Typhoon Haiyan, stronger exports and tourism, Economic Planning Secretary Arsenio Balisacan said on Feb. 4.

The government estimates growth of between 6.5 percent and 7.5 percent this year. The economy expanded 7.2 percent in 2013 and 6.8 percent in 2012, the fastest two-year pace since the 1950s, data compiled by Bloomberg show.

“A big chunk of the economy is driven by consumption,” Ramos said. “When GDP is growing, you know that a lot of people will be consuming more.”

Why The Philippine Economy Is About To Collapse

Forbes Writes:  Here’s Why The Philippines Economic Miracle Is Really A Bubble In Disguise

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The Philippines’ bubble will most likely pop when China’s economic bubble pops and/or as global and local interest rates continue to rise, which are what caused the country’s credit and asset bubble in the first place. The resumption of the U.S. Federal Reserve’s QE taper plans may put pressure on the Philippines’ financial markets in the near future. Another global economic crisis (as I expect) also puts remittances at risk.

As I’ve been saying even before this summer’s EM panic, I expect the ultimate popping of the emerging markets bubble to cause another crisis that is similar to the 1997 Asian Financial Crisis, and there is a strong chance that it will be even worse this time due to the fact that more countries are involved (Latin America, China, and Africa), and because the global economy is in a much weaker state now than it was during the booming late-1990s.

Read The Rest Of The Article

The article above is a MUST read for anyone living in the Philippines. Even though Philippines was the fastest growing economy in the world in the 3rd quarter of this year, the party is about to end.  I am sorry to say, but the Philippine economy is about to go through a major decline/contraction/collapse.   

I love the Philippines and I wish the economic backdrop was different, but the reality is hard to ignore. The article above is right on the money, providing outstanding reference points and data. Once again, I highly encourage you to read it.  Instead of commenting on the points in the article, allow me to introduce the Philippine stock market technical picture into the equation.

From technical side the market looks very weak. It looks like it is about to break down to the downside. Big time.  The market has tried on multiple occasions to go higher,  but was unable.  A breakdown below 5,500 level would indicate that the bear market in the Philippines in back. The problem is (a huge problem) is that there is no real technical support until it gets to about 2,000. That would be a 66% decline from today’s market prices. In other words, the stock market is predicting a devastating full on economic collapse in the Philippines.

Why do we care about this and what does it have to do with the Philippine economy? The stock market is a leading indicator. As it goes, the economy ALWAYS follows.  If we break down below 5,500 level, I would expect the Philippine economy to be in a recession within 6 months.  Everything else will follow. 

***In reality, this is a worldwide issue. A massive credit bubble is indeed here (driven by the US Fed and unsustainably low interest rates) and it will play a major role in the demise not only of the US Economy, but all emerging markets. Including China. As I have stated on numerous occasions, the US bear market will start in March of 2014.

When it does, anyone and everyone who relies on cheap credit to grow their economies will pay the price.  Unfortunately, that includes the Philippines. It is simply unavoidable. Get ready. 

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