Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling

In this issue

Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling

-The Astounding Collapse of BPO Investments

-Phisix Sets Artificial Record High on Money Supply Growth and Price Fixing

-Demonstrated Preference: Mr. Razon’s Selling of 3.18% Shares of Bloomberry and Wave of Insider Selling

Wow. BPO Investments Collapse as the Phisix Storms to New Heights! ICTSI’s Razon Sells 3.18% of BLOOM; Signs of Wave of Insider Selling

The Astounding Collapse of BPO Investments

In 2015, I prognosticated that the one-way projection by the mainstream of the BPO industry’s growth trend will eventually falter. And that’s because BPO growth dynamic will eventually reach its natural economic limits: [Phisix 7,100: Downgrades Transforms into Capex Cuts! More Signs of Cracks in the Philippine Property Bubble! Sept 20 2015]

Like all human activities, BPOs are subject to changes in demand and supply. The supply side of BPOs are dependent on many fluidly variable factors such as political, legal, labor/manpower, wages, input prices, infrastructure, competition and many others. A significant change in one or two of them may alter whatsoever comparative and competitive advantage the Philippines holds today. For instance, soaring taxes, or skyrocketing wages or a war with a neighbor will likely reduce the appeal for BPO investments or operations.

India used to be the lone powerhouse of BPOs, that’s until the Philippines got into the fray. Yet India holds six of the top ten in BPO destinations with 2 from the Philippines, one from Poland and from China based on the 2015 rankings by Tholons

The same applies to the demand side or the clients or principals of local BPOs, where any major changes in the conditions of their host nations or on global conditions may affect BPO investment or operations. For example, a global recession or depression may likely upend or delay the BPO boom.

Nothing is set on the stone.

If I am not mistaken, such limits have arrived. The law of diminishing returns has begun to afflict the BPO industry.

From the Inquirer.net (bold mine)

New investment pledges in the IT-BPM industry registered through various promotion agencies fell 34 percent in the second quarter from a year ago, continuing the decline in one of the country’s top dollar earners that the trade chief had partly attributed to the uncertainty in US policy.

Collecting the pledges registered through seven investment promotion agencies (IPAs), data from the Philippine Statistics Authority (PSA) showed that investment commitments in the business process outsourcing (BPO) sector totaled P4.9 billion in the April-to-June period in 2017, falling from P6.27 billion registered in the same months last year.

The latest figures of the Information Technology and Business Process Management (IT-BPM) industry showed the continued decline in investment pledges. The PSA earlier reported a 34-percent decrease in new pledges during the first quarter to P4.18 billion from P6.34 billion in the same three-month period in 2016…

Not the first time, instead a follow through from 2016…

This is not the first time that pledges shrank in terms of their growth rate.

According to PSA data, the expansion rate of these pledges had been on a decline since the third quarter of 2016. In spite of a more than 35-percent increase in pledges during the second quarter of 2016, commitments still finished the full year with a 22.6-percent decline to P30.74 billion from the previous year that had P39.73 billion.

PSA data suggested that the “anchor accounts” were not enough to offset the drop in new investment commitments. The latest figures pointed to a 28-percent decrease in the first half of the year, reaching P9.08 billion from P12.61 billion in the first semester of 2016.

Wow! TWENTY-THREE percent decline in BPO investments 2016! THIRTY-FOUR percent decrease in both 1Q and 2Q in 2017! A fall of 23% and 34% would signify as crashes!

Sorry, the IT-BPM provides no data set to the public for me to come up with a chart. Hence, I am limited on the citation of the news.

First of all, Mr. Trump won the US Presidency in the 4Q of 2016.  BPO investments started to fall in the third quarter of the same year. Thus, uncertainty over US policy may be rationalization or reasoning from price changes.

Second, the BPO industry has been projected to grow at a fantastic rate by almost every outlook published by the mainstream domestic and international institutions. They seem to have forgotten that since we live in a world of scarcity, the same scarce factors would serve to restrain an industry’s growth rate. As the great classical economist Adam Smith wrote, trade by virtue of the division of labor is limited “by the Extent of the Market”

Third, a collapse in BPO investments has tremendous implications. It would not only affect the sector’s output, productivity, and profits but likewise impact job generation, income and wage growth, as well as, financial conditions.

Fourth, like the auto industry*, a slump in investment would spread to the entire BPO ecosystem. Or a magnified slowdown will adversely impact the BPO’s upstream (e.g. real estate) and downstream (e.g. retail) sectors.

*Has Peak Auto Sales Arrived? Part 2; Downshift in Sales Growth Spillover to Auto Production! September 17, 2017

The ‘race-to-build-supply’ of the real estate, shopping mall and hotel industry had partly been premised on the expectations of the linear growth rate of the BPO industry. Just what would happen when the glaring mismatch between output and expectations becomes a reality? What industry or industries will replace the erstwhile sunshine BPO industry?

As a reminder**, OFW remittances are not the same as BPO remittances. OFW remittances signify as money intended for final consumption. BPO remittances signify as gross business revenues for BPO firms. It would be a folly to believe that apples (OFWs) are similar to oranges (BPOs), because the distribution of spending will be different between them.

**Phisix 7,250: Breakout on Shrinking Volume, Media Mounts Elaborate PR Campaign on the Property Sector, Why? October 25, 2015

Many major economic activities such as construction (construction permits and cement), manufacturing, car sales, consumer sales (retail sales) and BPO investments have manifested considerable weakness over the same timeframe. Has such been merely a coincidence? Or has there been a common causal mechanism that has spread to affect them?

Phisix Sets Artificial Record High on Money Supply Growth and Price Fixing

Curiously, the Philippine Phisix has stormed to unparalleled heights in spite of these unfolding crucial shortfalls in the real economy.

Add to the intensifying bifurcation of the Phisix and the real economy has been the near-zero net income growth in the 1H of PSEi 30 firms which had been brought about by one-third of its components which endured negative net income growth and the stellar 19% surge in PSEi non-bank debt!

 

Price actions in Philippine stocks have become totally detached from reality.

While it may be true that the Risk ON sentiment in Asia has partly filtered into domestic stocks, foreign participation has been largely absent.

In Asia, 8 of 17 national bourses have recorded 15% returns and above; as of September 22. (see upper window)  Except for two bourses, Asian equity bellwethers have either set new records or have reached some milestone levels.

The strengthening of the local currency has mostly been responsible for most of the record-setting of national benchmarks in the region.

However, like Mongolia, the Phisix has been one of the outliers where record stocks have coincided with the fall of the currency or the peso.

As an aside, Mongolia’s boom recently had a dramatic turnabout; the nation nearly plunged into an economic crisis until it was bailed out by the IMF in May 2017. Although, the IMF delayed part of its bailout payments, a week ago, due to political turmoil or the ouster of the government. This bailout must have spiked its stocks.

And unlike foreign-backed buying of the PSEi 30 during the run-up to the landmark high in April 2015 and in the test of the same level in 2016, September 2017’s fresh record has been MAINLY about local activities. Local punters have indulged in mindless and relentless bidding binges on select index sensitive issues. And that’s aside from the brazen price rigging which apparently has been countenanced by authorities.

The BSP’s data on the monthly portfolio flows (middle window) shows the difference in foreign participation in 2015 and in 2016 relative to the present. Foreign money has largely been a nonevent in the recent record run.

And this explains the low volume pump and the awesome divergence between the broader market and the PSEi 30.

Of course, the record PSEi 30 run can be traced to the BSP’s emergency policies: the historic low interestrates and the monumental deployment of domestic Quantitative Easing or monetization of the NG’s debt, as well as, the unprecedented use of wholesale finance to bolster GIRs.

 

As money supply growth picked up tempo, so did the Phisix.

More importantly, the intensive price fixing practices focused on the biggest market cap issues have been designed to elevate the index.

The top 6-7 issues have borne the extreme PERs of the PSEi 30 which has been a manifestation of the disproportion of bidding activities over the past years.

As I recently noted***: To be clear, I am not saying that the 2015 record won’t be broken. Given the intense price fixing process, whether it does or doesn’t shouldn’t be a concern. What matters will be the peso as an outlet for present policies. The Phisix hasn’t only been outclassed by the falling peso, in the context of record breakthroughs. The plight of the peso will also serve as a critical obstacle to the Phisix.

***BSP Has Been Right: No Foreign Exchange Crisis…For Now; But Devaluation Policies Amplify Risks! August 27, 2017

Let me guess, because the Phisix broke into new territory, August-September M3 may have likely surged past the highs of May 2016 and July 2017 at 13.5%

Demonstrated Preference: Mr. Razon’s Selling of 3.18% Shares of Bloomberry and Wave of Insider Selling

And there are anecdotal and empirical evidence of listed companies forcing up share prices of their own firm or of related companies. Such activities can be seen through disclosed interventions (SM Prime), as well as buybacks (Macro Asia, and lately AGI).

Interestingly, waves of insider selling can be seen in the PSE’s disclosures involving “Change in Shareholdings of Directors and Principal Officers”.

I may add that the recent sale by ICTSI tycoon Mr. Enrique Razon of his 350 million shares representing 3.18% stake in Bloomberry Resorts Corporation at Php 10.85 per share worth approximately Php 3.8 billion from his holding firm Prime Metroline Holdings Inc. to international institutional investors through an overnight placement emits the same symptoms.

Mr. Razon’s disposal of BLOOM shares would mark the third major sale by a majority stakeholder of their firm in the last two years.

The Gokongwei sold Php 11 billion ($250 million) worth of JG Summit shares at around Php 82.1 per share in May 2016 (September 22 close at Php 77) while the Ty family sold $172 million worth of GTCAP shares at about Php 1,539 (September 22 close at 1,201) in August 2016****

****The Other Possible Reasons Behind the $250 M Share Sale of JG Summit May 29, 2016, Following Gokongwei, Ty Family Unloads $172 Million Worth of GTCAP shares! August 11, 2016

I have explained the sales by tycoons in the context of demonstrated or revealed preferences.

Mr. Razon justified his actions by stating that the sale would increase liquidity that will be beneficial for investors and the company. Will the addition of 3.18% of liquidity or market float really improve the company’s financial conditions? The answer is no.

The critical factor of company’s financial conditions ultimately takes root from the long-term stream of revenues. Mr. Razon knows this. Hence, opportunity costs dictated the actions of Mr. Razon. He sold becausehe sensed cash as having more value than holding 3.18% shares worth Php 3.8 billion in shares. He can opt to sell at Php 4.0 billion, Php 4.5 billion, Php 5.0 billion or more. But he chose not to. That is because he is not sure that there would be takers at that level. Action speaks louder than words.

Mr. Gokongwei and the Ty family sold at the price climax of the shares of their respective firms. I would bet that Mr. Razon thinks the same way too.

And I would bet that the slew of insider selling from a diverse set of listed issues has been emitting the same signals. Corporate insiders may be cashing in on what they think as overvalued securities where cash would be a better option.

Why shouldn’t they? BPO investments have crashed.

Economic activities such as construction (construction permits and cement), manufacturing, car sales and consumer sales (retail sales) and listed firms’ eps have yet to present convincing clues of a meaningful recovery. 

Because of the reappearance of upside pressures and of price instability in the real economy, the prospects of a material rebound in these sectors would seem unlikely.

And the enormous growth in government expenditures would compound on such growth obstacles mainly through the ‘crowding-out’ effect in the real economy and in financial conditions.

Moreover, signs of strains in the real economy have induced companies to ramp up credit growth. And this gorging of credit has hardly brought about its desired effects. What this would bring is more risk in their balance sheets.