Philippine Mining Index: Reliving The March to 9,000!

``If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts, he shall end in certainties.” Francis Bacon (1561-1626)

TODAY’s bullish landscape has prompted some analysts to claim that economic “decoupling” from the US as reasons behind the ebullience.

While it is true that the global economy and the global financial markets have been outperforming its US counterparts, I remain a skeptic on the “economic decoupling” driving-the-global-financial-markets premise simply because global financial assets classes have grown significant correlations with that of the US.

In my view, outperformance does not equate to decoupling, it is a low or negative correlation that signifies one. February’s “Shanghai Surprise” was a vivid example; when US markets corrected using China’s tremors as an excuse, world markets simply mimicked the developments of the US markets. Had there been low or negative correlation, global markets could simply have ignored such event or got least affected, yet that was hardly the case.

Instead, in my opinion, the “US dollar decoupling” premise seems more circumstantially evident as the declining value of the US dollar has coincided with (most possibly a causal relationship) massive capital flows towards ex-US assets.

Anyway, the recent economic slowdown in the US has been discounted by the financial markets as “the Periphery” or particularly emerging markets have taken the load of the world’s growth as shown in Figure 3.

Figure 3: BCA Research: Emerging Market’s Domestic Demand Boom

According to one of our favorite independent research outfit, BCA Research, domestic demand growth from emerging markets have alternatively functioned as an engine of global economic growth (emphasis mine),

``Similar to the U.S. during this period, emerging markets are now the main source of global growth with very vibrant and dynamic economies. Consequently, emerging market currencies are remarkably strong, which is helping drive down inflation and interest rates in the developing world to levels lower than would otherwise be the case. In turn, purchasing power for emerging market consumers and corporations is being boosted, fueling domestic demand growth and benefiting stocks levered to this part of the economy.”

This has likewise been supported by Industrial production growth outperformance by emerging markets relative to G7 as shown in Figure 4.

Figure 4: US Global Investors: Industrial Outperformances by Emerging Markets driving Commodities

According to the US Global Investors (emphasis mine), ``Emerging economies industrial production keeps its steady pace, maintaining demand for base metals, as exemplified with copper. Strong global economic growth is the critical driver behind the commodity price appreciation; historically commodity related equities follow commodity prices.”

Figure 5: Philippine Mining Index Near 1997 high!

In our October 11 to 14, 2004 edition (see Philippine Mining Index: The March to 9,000-levels), we forecasted the Philippine Mining index then trading at the 1,900 level to reach at the 9,000 levels a 1987 high (to be exact July 21 1987 high of 9,185) over the coming years.

Today the Phimine hovers above its 2006 high and closed at 6,104.66 as of Friday and is about 400 points away from its 1997 high (March 21 high of 6,502.71).

With strong global growth fueling demand for supply restrained commodities, as evidenced by recovering industrial metal and precious metal prices, aside from the benign environment conducive for emerging markets assets, we find ample support to sustain the rise in commodity related equities similar to the view of US Global Investors.

In addition, in charting vernacular, the huge bullish J.LO (coined by Wall Street with reference to Jennifer Lopez’s derriere) “rounded” bottom, represented by the green blocked arrow, as shown by Figure 5, lends us even more support on the grounds that the 9,200 barrier will be a realizable target in a not too distant future.

Stay long the mines and commodity related issues.