Sunday, July 17, 2011

Expect a Rebound from the Lagging Philippine Property Sector

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance, by repeated doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop, either because the banks are getting into a shaky condition or because the public begins to balk at the continuing inflation, that retribution finally catches up with the boom. As soon as credit expansion stops, then the piper must be paid, and the inevitable readjustments liquidate the unsound over-investments of the boom, with the reassertion of a greater proportionate emphasis on consumers' goods production. Thus, the Misesian theory of the business cycle accounts for all of our puzzles: The repeated and recurrent nature of the cycle, the massive cluster of entrepreneurial error, the far greater intensity of the boom and bust in the producers' goods industries. Murray N. Rothbard

Two of last week’s cynosure or market darlings had been East Asia Power [PSE: PWR] on a mind boggling gain of 232%, and Boulevard Holdings [PSE: BHI] 31.4%.

PWR can now be considered as a property issue considering the takeover by Century Properties has been formalized[1]. Meanwhile, BHI’s rumored acquisition by another real estate giant has yet to be confirmed.

To me, these developments signify as writing on the wall.

Where the huge breakout by the Phisix has been validated by broad market based bullishness or a “rising tide phenomenon”, a confirmation or continuation of these upside biased actions on the Phisix would also mean rising prices of property issues.


During the recent phase of the bubble cycle, which began in early 2009, the property sector (top window, blue line) has mostly led or outclassed the Phisix. This seems in stark contrast to the financial sector (lower window, red line) which has mostly lagged the local benchmark.

The two large red circles I drew demonstrate the occasions where the Property sector has vastly outperformed the Phisix and the green circle which reveals that the roles have reversed.

This implies two possible scenarios:

-one, the lagging property sector could be an anomaly that would eventually revert to the mean, or

-two, the seeming laggard effect could be representative of a new trend.

The 6 biggest property sector according to their free float market cap weighting in the PSE Property basket are (in pecking order[2]): Ayala Land 35.96% [PSE: ALI], SM Prime Holdings 17.92% [PSE: SMPH], Belle Corporation 10.97% [PSE: BEL], Megaworld Corporation 7.91% [PSE: MEG], Robinson’s Land 7.66% [PSE: RLC] and Filinvest Land 5.01% [PSE: FLI].

The performances of the big six on a year to date basis in %:


Only BEL and SMPH posted gains so far, while the others remain in the red, with Megaworld suffering the most.

The massive divergence between the price actions of most of these property heavyweights and the Phisix is the reason why the property sector has conspicuously trailed.

Yet parsing on the recent price trends….


…I find that the returns on the table above haven’t been revealing exactly what has been happening.

Individual trends suggest that there has been an ongoing rotation; leaders BEL (blue) and SMPH (black candle) appears to be in consolidation whereas the laggards have all been ascendant, namely RLC (violet), ALI (red), FLI (orange) and Megaworld (green).

So the rising tide has already begun to filter into the worst performers and we would likely see more of the same actions going forward.


With the steep local yield curve (left window) along with the domestic monetary environment operating on negative real interest rates (right window), which the World Bank chart confirms my earlier observations[3], foreign portfolio inflows should include not only investments in equities but also on real estate which should likewise get reflected on the Phisix Property index.

And the same forces are likely to also impel locals to get into a property acquisition binge.

A construction boom can be ubiquitously seen in the Metropolis as new buildings grow like mushrooms. Such anecdotal evidence appears to be confirmed by the reported $ 1.19 billion worth of real estate investments for the first 5 months in 2011[4].

And the property sector signifies as a capital intensive sector most receptive to the monetary policy induced Austrian Business Cycle.

To quote the great Murray N. Rothbard[5], (bold emphasis mine, italics original)

For businessmen, seeing the rate of interest fall, react as they always would and must to such a change of market signals: They invest more in capital and producers' goods. Investments, particularly in lengthy and time-consuming projects, which previously looked unprofitable now seem profitable, because of the fall of the interest charge. In short, businessmen react as they would react if savings had genuinely increased: They expand their investment in durable equipment, in capital goods, in industrial raw material, in construction as compared to their direct production of consumer goods.

Like the capital intensive mining sector, the domestic property sector will undergo a boom bust cycle phase.

Bottom line:

The lagging effect of the Property sector seems more of an anomaly than an evolving trend.

The breakout of the Phisix should be seen as a catalyst that could launch the next leg up for the property sector.

The upcoming rebound would not only close the underperformance gap but would also power this sector as one of the best performers.

The Philippine property sector as I earlier predicted will see a boom phase[6] (again barring any exogenous shocks). Real estate or property booms have traditionally functioned as the centrifugal force from a monetary induced bubble cycle. This has been very evident in China[7]. And likewise became the ground zero for the US mortgage-banking crisis[8].

Well it’s time to profit from the political folly.

[1] Century Properties seals deal to take over East Asia Power, July 12, 2011

[2] based on Friday’s close and only considered weights of 5% up

[3] See Phisix: Negative Real Interest Rate and Stagflation Risks, June 12, 2011

[4] Surge in investment shows return of investor's confidence, July 2, 2011

[5] Rothbard, Murray N. The Austrian Theory of the Trade Cycle, Economic Depressions: Their Cause and Cure,

[6] See The Upcoming Boom In The Philippine Property Sector, September 12, 2010

[7] See China’s Bubble Cycle: Shadow Financing at $1.7 Trillion, June 28, 2011

[8] See 2008 US Mortgage Crisis: The US Federal Reserve and Crony Capitalism as Principal Causes, May 31, 2011

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