CONCLUSION: Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market.
On AUG 31, 2011, we published a note titled: “PHILIPPINES: ONE OF THE BETTER STORIES IN GLOBAL MACRO”; the conclusion of the note was as follows:
“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.”
Since that date, the country’s benchmark PSEi Index is up +14.2%, which roughly double the comparable return of the S&P 500 and, over that duration, +14.2% good for sixth place atop the performance leader board of the 84 global equity indices and SPX sector ETFs we track. Moreover, of the 48 international currencies we track, the Philippine peso’s (PHP) -2.2% decline vs. the USD since AUG 31 is good for 9thplace atop that performance leader board – meaning the dollar-based returns of US investors would have been far more protected relative to the vast majority of other international equity investments during this latest intermediate-term King Dollar breakout.
Additionally, Philippine President Benigno Aquino has stated in recent weeks that while he “prefers to let market forces decide [the peso exchange rate]”, he’s comfortable with a 5%-plus appreciation from current prices to the 41 per USD level and will seek to protect it in the event it depreciates towards the 45 per USD level (-4% from current prices). Relative stability on the currency front can’t be discounted as a positive factor in today’s environment of rising FX volatility – a phenomenon that has repeatedly eroded the earnings growth of developing-nation corporations in recent years (see: India, Brazil, Turkey, etc.).
From a forward-looking perspective, Philippine’s TREND-duration GROWTH/INFLATION/POLICY outlook remains quite supportive of further equity market gains over that timeframe and sober and proactive fiscal and monetary policy means the country has quite a few levers to pull in the event the situation in Europe takes a dramatic turn for the worse.
In addition to his team’s victories on the policy front since his inauguration in JUN ’10 (six-year term), President Aquino has won over investors with his reform agenda, a core tenet of which is tackling the perception of corruption that has casted a dark shadow over the Philippine economy over the years. The recent conviction of foyer Chief Justice Renato Corona for illegally concealing his wealth sends a powerful message that neither corruption nor tax evasion will continue unabated under Aquino’s watch. That’s a positive for international investment flows into the Philippine economy – particularly from investors who are rightfully becoming less enamored with the TAIL-duration fundamental outlooks in some of the more notable developing nations like China, India and Brazil.
In the current investing environment where inflows continue to be hampered by the economic and financial market volatility stemming from excessive gov’t intervention, taking share is the best outcome any country can ask for. No doubt, Philippines has been taking share; as recently as today, Aquino and his team won an additional $650-$750M of foreign direct investment into his $200-plus billion economy from UK corporations. The next stop on his international road show is the US, where Aquino and his trade, finance, energy, defense, tourism, transport and foreign affairs secretaries will meet with President Obama on JUN 8. We expect additional “wins” as US corporations/investors may find the Philippines to be an increasingly attractive destination for diversifying their EM exposure.
All told, Philippines remains one of the better fundamental stories in Global Macro and we reiterate our favorable TREND-duration view on the economy and its equity market. Furthermore, we believe fiscal and monetary policy levers as well as the country’s reliance on domestic (i.e. not external) demand for economic growth should keep the PSEi Index outperforming in an environment of continued Global Macro headwinds.