Showing posts with label protectionism. Show all posts
Showing posts with label protectionism. Show all posts

Monday, March 04, 2024

Philippine PSEi 30: ICT’s Parabolic Share Price Moves Unsupported by 2023 Financial Performance


Although these episodes occurred centuries ago, readers will find the events eerily similar to today's bubbles and busts: low interest rates, easy credit terms, widespread public participation, bankrupt governments, price inflation, frantic attempts by government to keep the booms going, and government bailouts of companies after the crash. Although we don't know what the next asset bubble will be, we can only be certain that the incessant creation of fiat money by government central banks will serve to engender more speculative booms to lure investors into financial ruin—Douglas French

 

Philippine PSEi 30: ICT’s Parabolic Share Price Moves Unsupported by 2023 Financial Performance

 

On ICTSI’s price blitzkrieg deviating from 2023 Financial Performance: "This is nuts. When’s the crash?"

 

Though ICTSI [PSE: ICT] was the first among the PSEi 30 members to submit their 2023 annual report, the near vertical price surge since the end of October 2023 has intrigued us the most.

 

ICT has returned 14.75% YTD (week ending March 1st) and by about 42% since (October 27th, 2023).

 

Figure 1

 

ICT is one of the "parabolic 4" that has contributed to the thrust of the PSEi 30 to the present 7,000 levels.

 

Put differently, ICT's parabolic move, which pushed it to the 5th largest free float market cap, has anchored a substantial segment of the PSEi 30's recent low-volume advances.

 

Figure 2

 

Paraphrasing my tweet last December 26th, "ICT is a bet on globalization. Its topline performance has resonated with Philippine external trade and global trade. But, the world's transition to a war economy translates to a realignment into trading blocs or quasi-autarky (via industrial policy, economic nationalism) or a combination thereof."

 

UNCTAD's trade pattern partially demonstrates this shift.

 

The escalating frictions from geopolitical developments exhibited by the Russia-Ukraine war, the Israel-Palestine war, the US-Houthi war, and economic war in many forms (weaponization of the US dollar, trade, investment, information, capital, technological development, cyberspace, space programs, and social mobility flows) translate to various bottlenecks in trade, logistics, and supply (shipment) flows.

 

Higher costs from these factors should serve as Team Transitory's (inflation) wet dreams.   Unfortunately, rising supply costs won't necessarily extrapolate to a general price increase—unless supported by (demand) credit or liquidity expansion.

 

Instead, the likely impact is to scuttle many international Small and Medium Enterprises (SMEs) operating on low-profit margins, which should further weigh on demand. 

 

The World Bank and the UNCTAD expect global trade to slow significantly.

 

We are no fans of the establishment punditry, but (global) recessionary forces combined with geopolitical dynamics could escalate economic and financial risk factors.  Japan, and the UK slipped into a recession in 2H 2023.

Figure 3

 

In looking for clues of ICT's price behavior, we discovered that none of the share price charts of some of ICTSI's key rivals have echoed its manic share price bid: Cosco ShippingAPM TerminalsChina Merchants Port Group, and CK Hutchison Holdings Limited (merged entity of Hutchison Whampoa and Cheung Kong Group).

 

Sure, current price actions may signify a company’s specific developments.

 

But, as noted above, in reference to its Q3 performance, ICT's topline performance partially manifested the Philippine external trade and global trade activities.


Figure 4

 

In Q4 2023, ICT suffered a second straight almost stagnant growth (up by +3.5%), nearly echoing the slump in Philippine external trade growth (-5.22%).

Figure 5
 

In 2023, gross port revenues (6.5%) and total revenue growth (7.01%) fell to their lowest since 2020 (based on USD 000s).

 

Meanwhile, net income growth contracted by 14.2%.

Figure 6

 

And nearly typical to major PSEi components, debt servicing costs expanded 10.96% from rising rates, signified the only growth area, even as the firm's total debt slipped by 12.1%. 

 

With PE converted into the BSP's USD-Php average in 2023, ICT's 2023 trailing PER was 21.4 (as of March 1st) based on 2023’s Php 13.54 eps, which was down from Php 15.64 in 2022 (or a decline of 15.3%).


That is, marginal players made maniacally bid on ICT prices in Q4 amidst a deterioration in fundamentals!


As it happened, the push on ICT shares represents price multiple expansion.

 

Or, based on its core port business operations, hardly anything seems to support the manic bidding in ICT's share prices except for three things: the adrenaline rush from FOMO (fear of missing out), unknown unknowns (insider play or magic?), and the unpublished desire by some influential groups to pump the PSEi 30 into a technical bull market—that would draw in a gullible crowd of empty bag holders.

 

In any case, will Newton's third law of motion—for every action (force) there is an equal and opposite reaction—eventually prevail?

 

To borrow a quote from the Financial Times: This is nuts. When’s the Crash?

 

Stay tuned.

 

Monday, April 17, 2023

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!

 

Governments lie; bankers lie; even auditors sometimes lie: gold tells the truth— William Rees-Mogg 

 

Investing Gamechanger: Commodities and the Philippine Mining Index as Major Beneficiaries of the Shifting Geopolitical Winds!  

 

Geopolitics is now a primary driver of the transitioning global economic structures.  Since commodities are one of its beneficiaries, the Philippine mining index should reflect this dynamic. 

 

Geopolitics is the Name of the Game: Philippine Enters the Geopolitical Hegemonic Contest via the Reinforcement of the VFA-EDCA Agreement with the US 

 

Unless one lives under a rock, geopolitics is the name of the game! 

 

And commodities are one of the primary elements of geopolitics. 

 

Signed in 2014, the Enhanced Defence Cooperation Agreement (EDCA) represents an agreement between the US and the Philippine governments to expand their defense alliance by allowing the United States government "to build and operate facilities on Philippine bases for both American and Philippine forces." (Wikipedia) 

 

From the original five (non-permanent) bases (Palawan, Cebu, Pampanga, Nueva Ecija, and Cagayan de Oro), the incumbent administration has added four more facilities for US military access (Palawan, Isabela, Lal-lo Cagayan, and Santa Ana Cagayan) early April. 

 

And it is no coincidence that the expanded "pivot" by the Philippine government towards the US occurred as the Chinese military's partial intrusions on Taiwan's border to test Taiwan's defense capability has grown with frequency and scale.   

 

China's military has also been aggressively encroaching on the maritime boundaries of different neighbors as the Philippines in the South China Sea. 

 

The Xi regime has accused the Philippine government of interfering with the China-Taiwan conflict. 

 

The broader picture is that these territorial disputes are an extension of the hegemonic contest between the reigning superpower, the US, and her (NATO) allies against her emerging challengers (the Global South/BRICs).  The Russo-Ukraine War is a ripe example of the manifestations of the unfurling power struggle via kinetic warfare.  

 

But this increasingly confrontational hegemonic conflict has stretched to cover many other areas, including but not limited to trade, investments, financing, money, commodities, social mobility, space, deep-sea, technology and information, and more.  

 

And this expanded friction will unlikely diminish even if contending parties miraculously find a settlement to the Russo-Ukraine War—the other areas of dispute will persist. 

 

That said, commodities will be a principal element in a fragmented world. 

 

And NO economic analysis will be complete WITHOUT the role of geopolitics. 

 

Why Commodities Will Play a Principal Role in the Era of Fragmentation/Inflation 

 

One crucial evidence of malinvestments from the easy money policies of central banks is the severe underinvestment in the commodity sector that has led to a shortfall in supplies. 

 

The liquidity bailouts of global central banks during the pandemic exposed this accrued imbalance. 

 

Figure 1 

 

For instance, the stockpiles of industrial metals, like copper, are at their lowest in history. (Figure 1, top and middle charts)  

 

Yet it requires massive amounts of capital and time to increase exploration activities to generate expanded output.  And this isn't happening anytime soon. 

 

Further, with the world standing on the precipice of an expanded kinetic war, global public spending on defense will likely take a lead role, reshaping subtlely the global economic backdrop to a quasi-war economy. (Figure 1, lowest window) 

 

In nominal terms, global defence spending has been on a strong upward trajectory over the last five years, increasing from a nominal USD1.7 trillion in 2017 to USD2.0tr in 2022. Until recently, the same could be said of defence spending in real terms, but this upward trend stalled in 2021 and 2022 owing to escalating inflation, leading to a widening delta between nominal and real spending. Using 2015 as the base year for real terms calculations, the difference came to USD101bn in 2020. This more than doubled to USD222bn in 2021 and increased again to USD312bn in 2022. (McGerty, 2023)  

 

More public spending to develop an end-to-end military system diverts resources and finances from the private sector, which leads to production inefficiencies and relative shortages of consumer goods—which means structural supply-side imbalances, ergo contributor to inflation. 

 

In this case, the build-up of armaments requires massive amounts of different commodities/metals, like copper, nickel, silver, and more.   

 

The increasingly fragmented world should aggravate such supply constraints through the various restrictive and protectionist policies anchored on nationalism and geopolitical alliances. 

 

Again, the multi-faceted aspects of this power struggle won't be limited to military and trade but will involve the currency and financial system.  

 

Ergo, a potential challenger to the de facto USD standard--should emerge with this transition to a multipolar world. 

 

As evidence, several countries have been realigning their geopolitical relationships in favor of the Global South/BRIC. 

 

In the past few weeks, earth-shaking announcements from several countries with the intent to join the bandwagon of the establishment of an emerging rival currency system. 

 

Here are some events as compiled by the Kobeissi Letter (Twitter) 

 

-Iran said they are reducing their dependence on the US Dollar for regional and international trade.  

-France said Europe should reduce dependence on the US.  

-Meanwhile, Russia, Saudi Arabia and China are now trading with Chinese Yuan. 

 

Figure 2 

 

In any event, in conjunction with the drawing of the financial and monetary divide, global central banks amassed a record amount of gold in 2022. (Figure 2, topmost window) 

 

And instead of mimicking the current USD system, structured on a Triffin dilemma of debt and inflation-financed twin deficits, the competing currency standard will likely be backed by a basket of commodities.  A Bretton Woods 3 template as proposed by Credit Suisse's Zoltan Pozsar, perhaps? 

 

Commodity reserves will be an essential part of Bretton Woods III, and historically wars are won by those who have more food and energy supplies – food to fuel horses and soldiers back in the day, and food to fuel soldiers and fuel to fuel tanks and planes today.  

 

 

 

This is serious: Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left). (Pozsar, 2023) 

 

Central banks will also play a significant role in financing public spending.  And in the backdrop of supply tightness, such monetary expansion should extrapolate to higher inflation, which also implies rising rates. 

 

And though the demand for metals in the electric vehicle industry may also be a part of the narrative, the focal point of the economics of commodities is the increasing fragmentation of the global economy. 

 

So decades of underinvestments that led to shortfalls in supply, the fracturing of the international division of labor and its geopolitical realignment, the quasi-militarization of the global economy, principally through central bank finance and partly via private sector participation, and finally, the emergence of competition to the US standard, heralds to higher demand and increased prices of commodities.  

 

The era of globalization, financed by easy money, will likely usher in the eon of fragmentation, marked by a milieu of high inflation and elevated rates. 

 

The Philippines will not be exempt from this seismic global transformation.   

 

The complementary bases under the VFA-EDCA, the Balikatan exercises, and other related participations constitute crucial economic and geopolitical drifts, which along with their corresponding risks, will likely come with consequences—as history has shown. 

 

The Philippine Mining Index in the Era of Fragmentation/Inflation 


To an observant eye, the subtle shifts have already been happening.  The unspoken changes in the performance of the share prices of listed commodity producers illustrate such developments. 

 

While USD coal prices rocketed from 2020 through September 2022, it had given up most of its gains.  But it is still above the highest level since at least 2010. (Figure 2, middle chart) 

 

As in the case of Europe, Japan, and elsewhere, the ESG thrust to replace coal with renewables as baseload supply will likely backfire.  Natural gas and nuclear power could be the future of Philippine energy.  The Philippines saw its first LNG import this month. 

 

Despite the short-term oscillations, USD prices of copper and nickel are in a long-term uptrend but below their recent highs. (Figure 2, copper-lowest diagram) (Figure 3, nickel topmost chart) 


Figure 3 

 

On the other hand, while USD gold prices have also been on a structural uptrend, it has yet to show a convincing breakout. (Figure 3, middle pane) 

 

But it did so against 5 ASEAN currencies (Philippine peso, Thai baht, Malaysian ringgit, Indonesian rupiah, and Vietnam dong) last April 6th. 

 

In any case, coal (Semirara SCC), Nickel (Nickel Asia NIKL, Global Ferronickel FNI, and Marcventures MARC), and Gold-Copper (Atlas AT, Philex PX, and Lepanto LC and LCB) comprise 96.32% of the Philippine Mining index as of April 14th.  Oil exploration firm PXP completes the 9-member roster.  (Figure 3, pie chart) 

 

The Philippine mining index is the most unpopular and possibly the "least owned" sector.   The institutional punters have likely ignored the industry.  

 

Figure 4 

 

As proof, the industry has had the smallest share of the monthly trading volume since 2013. (Figure 4, upper window) 

 

Local participants perceived this as highly speculative (higher beta), thus subject to intense ebbs and flows.   

 

Nota bene: Though several other mining and oil issues have not been part of the index—a rising tide usually lifts all—if not—most boats. 

 

More, its lack of correlation with the PSEi 30 should make it a worthy diversifier.  

 

But with the current climate of overindebtedness and rising rates seen with most mainstream issues, the market may likely have second thoughts about this disfavored sector. Soon. 

 

In the 70s, mines constituted many members of the Philippine Phisix, presently PSEi 30.   

 

That 70s show, marked by the age of inflation, may yet stage a comeback. (Figure 4, lowest pane)  

Figure 5 


Despite the low volume and a depressed sentiment in the general market, a divergence has emerged between the Mining index and the headline index. (Figure 5, upper chart) 

 

In fact, as a ratio of the PSEi 30, the mines have been reservedly outperforming since March 2020. (Figure 5, lowest diagram) 

 

If the advent of the era of fragmentation or the age of inflation materializes, could the consensus eventually be chasing a new bubble? 

 

Disclosure: This author holds exposure to some of the mining & oil issues. 

 

____ 

References 

 

McGerty Fenella Global defence spending – strategic vs economic drivers; Military Balance Blog, February 15, 2013, International Institute for Strategic Studies 

 

Pozsar, Zoltan: Money, Commodities, and Bretton Woods III; March 31, Credit Suisse Economics 

 

Nota Bene: The newsletter intends to apprise readers of the market conditions based on the information available at the time of the items’ writing, whose accuracy and timeliness of the issues concerned are subject to change without prior notice.   Solicitation to trade is neither intended by the contents. In the meantime, the discussion of occasional positioning on particular issues are opinions of this author.