Conclusion: The Philippines is shaping up to be one of the better country-level fundamental stories in Global Macro over the intermediate term and our core three-factor quant model is supportive of our bullish thesis.
Position: Long Filipino equities (EPHE).
Today Keith initiated a long position in Filipino equities within our Virtual Portfolio, giving us exposure to one of the few remaining positive fundamental stories out there. Specifically, what we like about the Philippines are accelerating economic growth, slowing inflation, and sound monetary and fiscal policy – the same three factors which cause us to get behind any country on the long side.
On the growth front, our models pin the country’s second quarter real GDP growth rate of +3.4% YoY (reported today) as an intermediate-term bottom. Specifically, we see over 100-200bps of upside over the next two quarters. Even amongst a deteriorating global growth outlook, our view on Filipino economic growth is supported by accelerating domestic demand within the defensive, consumption-led economy (private consumption accounts for just over 73% of GDP).
We see demand growth accelerating for two key reasons:
- Inflation is slowing; and
- “The Aquino Put”
To the former point, CPI appears to have peaked in June, with July coming in a +5.1% YoY and our model is pointing to lower-lows from current levels over the intermediate term. This is supported by our Deflating the Inflation thesis and sequentially tougher comparisons across the commodity front in the coming months.
Interestingly, Fed Head Chuck Evans went on an inflation marketing campaign yesterday on CNBC and attempted to verbally debauch the U.S. dollar to lower all-time lows. Whether the Fed actively pursues such a strategy in the form of incremental policy remains to be seen; we do, however, continue to believe that Bernanke is in a box at least for the next 3-6 months regarding being able to hint at/implement Quantitative Guessing Part III. For now, slowing inflation should provide a much-needed tailwind to Filipino consumption growth.
An incremental tailwind for the Filipino economy at large could come in the form of monetary easing over the next couple of quarters – particularly if we remain correct on the slope of global growth (negative) and global inflation (flat-to-down). Today, Economic Planning Secretary Cayetano Paderanga affirmed our view, saying that the central bank had “more flexibility” regarding the setting of its benchmark overnight borrowing rate, as “inflation is slowing”.
Additionally, Banko Sentral ng Philipinas Deputy Governor said today that “lower economic momentum will be an important consideration” in the next monetary policy meeting (next Thursday). As things continue to unravel in Europe, we expect to see the Banko Sentral ng Philipinas board use popular central banking terms like “uncertainty” when describing the global economic outlook as a reason to hold rates flat (after +50bps of hikes YTD) – joining several other key economies from Asia to Latin America to have done so in recent weeks, most notably Australia and Mexico.
Most importantly, should global growth accelerate to the downside in the coming quarters, Filipino policymakers are well-equipped to weather the storm, with an ability to cut the country’s 4.5% benchmark interest rate, a low and shrinking deficit thanks to President Aquino’s aggressive tactics over the past year (-2.25% of GDP), and a relatively low debt/GDP ratio of 47.3%.
If needed, the Filipino government’s healthy fiscal metrics will allow the country to enact what we have termed “The Aquino Put”. Simplistically, the outspoken president has pledged to increase expenditures on infrastructure in the form of $17 billion worth of investments in the country’s roads, airports, and schools. Specifically, Budget Secretary Butch Abad said today that policymakers may choose to pull forward and implement projects originally scheduled for 2012 “to help the economy recover”.
All told, we are all bulled-up on Filipino equities from a fundamental perspective and our core three-factor quant model is supportive of our bullish thesis. For these reasons, we have chosen to go long of the securities in our Virtual Portfolio.