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 Shipping, APM Terminals, China 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.

 

Graphic: The Globalization of Boeing’s Dreamliner

Assembled in the US, much of what makes up the Boeing’s Dreamliner has been sourced overseas

Source Reuters; hat tip Businessinsider

Note: Since the following graphic has been dated in January 2011. There may be changes on them

Bill Gross: Past Performance in the Age of the New Normal

In the age where central banks have been propping up asset prices via the “wealth effect” as a way to lubricate “aggregate demand”, generating returns from investments requires unorthodox or unconventional or methodological templates.

So says Bond guru Pimco’s Bill Gross.

From Bloomberg (bold mine)

Bill Gross, manager of the world’s largest mutual fund, said the most renowned investors from Warren Buffett to George Soros may owe their reputations to a favorable era for money management as expanding credit fueled gains in asset prices across markets.

The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer, Gross, 68, wrote in an investment outlook published today entitled “A Man in the Mirror,” named after a song by Michael Jackson.

“All of us, even the old guys like Buffett, Soros, Fuss, yeah - me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” Gross wrote. “Perhaps it was the epoch that made the man as opposed to the man that made the epoch.”

Gross, one of the co-founders in 1971 of Newport Beach, California-based Pacific Investment Management Co., is examining his legacy as the bond shop he built over four decades is seeking to adapt to an environment that looks very different from the bull market that fueled Pimco’s growth to one of the largest money managers in the world. The prospect of elevated market volatility, an aging population and climate change could make investing far more challenging in the coming decades, Gross said.

Bottom line: Past performance does not guarantee future outcomes.

Relying on historical data or statistics will unlikely be of a big help in the era founded on the deepening frictions from market distorting central banking inflationism and politicization of the financial markets via financial repression relative to changes in demographics, globalization and the information age.

To quote from the investing sage of Omaha (now crony) Warren Buffett,

If past history was all there was to a game, the richest people will be librarians.

How Regulations Deter Investments: The China-Europe Story

Many Chinese firms including State Owned Enterprises (SoE) have been considering to invest in Europe as the latter eyes $560 billion of Chinese FDIs in 5 years.

Unfortunately regulatory barriers have been a huge turn off

From Reuters:

But getting your head around European laws and visa restrictions, as well as the fear that tough economic times could spark more political instability, make Europe hard to navigate for Chinese firms.

In fact the surveyed firms perceive Africa and the Middle East as having a more favourable business environment than the EU.

Chinese firms find EU law particularly troublesome because there is no unified inbound investment approval process and some member states have their own security reviews…

Six in 10 of the firms surveyed were SOEs and the most popular EU country for Chinese investment was Germany, with France a distant second.

Chinese firms asked for more support with the operational issues they face from policymakers in Europe and back home.

Regulatory obstacles can also signify as forms of disguised protectionism via technical barriers to trade as product or safety standards as well as people protectionism which limits flow of people.

The European crisis will hardly be resolved until real reforms to promote a business friendly environment or by the liberalization of the economy.

Also the above also reflects on the Africa’s ‘globalization’ boom story which has been attracting lots of Chinese investments. Chinese FDI reportedly zoomed to $14.7 billion in 2012 up by 60% from 2009 (ChinaUSfocus.com)

Reasons for US Insourcing

Mercantilists previously argued that in order for the US to regain competitiveness expressed via investments outsourced to China, the US needs to devalue. How misguided this perspective had been.  

While the US has indeed by inflating (devaluing) everyone else has been doing the same including China’s PBoC.

From Mao Money, Mao Problems

The net effect has been to negate each other inflationist policies and instead such seemingly collaborative actions has spawned a global asset boom.

Recently, reports suggest that the US has now been experiencing greater degree of reverse outsourcing, or insourcing. In a verbose report, the Atlantic suggests the following reasons:

-Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

-The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

-In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.

-American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

-U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

While the above may be true, this seems insufficient.

I may add that numerous wealthy Chinese have likewise been seemingly anxious about China’s political economic conditions, such that they have been looking elsewhere to shelter their capital.

From Reuters

In short, US insourcing relative to China may not have been entirely about economic issues but also about politics. 

The risk of an economic bust from China’s assimilation of Western Keynesian policies, that has ballooned a huge shadow banking industry and skyhigh debts, which have intensely increased the risks of a financial and economic bust. This implies that concerns over political instability may have been prompting China’s wealthy and capitalist class (along with cronies) to consider safehaven alternatives abroad. The increasing political risks may serve as a major reason for the US insourcing.

And political risks has also been manifested in China’s gunboat  diplomacy with Japan and Southeast Asia over territorial issues, which has been most likely a diversion from her brewing economic woes.

I might add advances in technology may be a factor too. For instance, advances in 3-D printing may eventually bring manufacturing to the household, which may reduce cross border FDIs relative to manufacturing.

The bottom line is looking at US insourcing relative to China may not signify as an accurate picture of global investment flows. That’s because there is a whole world of other options via many other capable emerging markets than China alone.

Meet the Best ASEAN Economy in 2012: Booming Laos, Powered by Liberalization and the Informal Economy

Which has been ASEAN’s best performing economy in 2012? 

Well it’s not what the politically blinded domestic media and politicians think... 

Instead Laos gets the credit, according to the Wall Street Journal, (bold mine)

To be sure, 8.3% growth isn’t exactly going to set investors’ hearts aflutter given that landlocked Laos has Southeast Asia’s smallest economy, and the opportunities for making money there are limited. Road and rail links are limited and the lack of a skilled labor makes Laos a tough bet for large manufacturing operations.

But this year’s strong performance underscores the longer-term trend in a country that has consistently been one of Asia’s outperformers, including average growth of 7% a year over the past decade. Although nominally a Communist nation, Laos has liberalized its economy since the 1980s, and income levels have been rising.

Much of the country’s growth these days is coming from mining, hydroelectric power and construction, all of which are relatively insulated from the turmoil in Europe and the related drop in export activity that has hurt some other Southeast Asian nations. Some economists fear Laos may be over-reliant on those sectors, despite their resilience this year.

But Laos is expected to be accepted into the World Trade Organization on Friday, and over time that should help it attract more diverse drivers for the economy, including more of the manufacturing that has transformed other Southeast Asian nations. Leaders are especially hopeful Laos can lure some of the garment-factory investment that has helped create tens of thousands of jobs in nearby Cambodia.

Either way, Laos is already seeing the impact of all the recent growth, with conspicuous consumption noticeably on the increase. Shiny new Cadillacs and Mercedes Benz cars – and even at least one Ferrari – are spotted on Vientiane’s streets. Sushi restaurants, boutique hotels and wine bars are proliferating.

A. Barend Frielink, deputy country director for the Asian Development Bank in Vientiane, says he almost ran into a Bentley in town recently.

“There is suddenly a lot of cash” in Laos, he said—so much so that economists don’t have a fully satisfactory explanation for all the spending. Partly it’s because Vientiane has undergone such a construction boom in recent years, with major projects to build new hotels and upgrade roads. Analysts have also pointed to gains from illicit drug trading and logging, though the economy has also earned a lot from its more legitimate sources of growth, including mining, that have helped spawn a larger consumer class.

Some important insights:

Geographical quirks such as being “landlocked” serves not as an obstacle to wealth generation brought about by voluntary trade or economic freedom.

Laos’ outperformance has principally been driven by policies of liberalization and the informal economy. 

GDP per capita (US dollar) has been exploding since Laos 1980s when she began liberalization, chart from Tradingeconomics.com

And as consequence to liberalization policies and the prospective inclusion to the World Trade Organization (WTO), economic growth which essentially emanated from very small base should translate to further leaps in output expansion.

In addition, the Stock Exchange in Laos or the Lao Security Exchange (LSX) which began operations in 2011 had been up 16.7% on a year to date basis, as of last Friday’s close. The above chart from Bloomberg, exhibits the LSX since its inception.

Lastly, the mainstream’s ‘confusions’ about where cash or economic growth has been coming from, like the Philippines, has largely been due to the poor understanding of the informal sector.

The IMF estimates the informal sector as accounting for 33.4% of the GDP of Laos (2002-2003). 

I think the role of the shadow sector has been immensely underestimated.

The informal sector share of the labor force according to ASEANSEC.org accounts for over 40% in 2005.

For the mainstream, the informal economy functions like a vacuum or an unreal world or has been reduced to illegal transactions, which hardly has been accurate. Yes there are some immoral activities, but they account only for a fraction.

However in Laos, a large segment of the informal sector deals with agriculture related products, goods and or services.

The informal economy becomes a huge puzzle when reality and statistics via the expert’s econometric models do not add up.

They forget that a priori, the thrust for human survival is either through economic or political means (Franz Oppenheimer)

Economic means is when people intuitively will work to survive through the formal or through the informal shadow economy or through “politically illegitimated” trades.

Or the alternative, stealing or plunder which have mostly been coursed through the political route.

A social system that survives segments of unproductivity can only be made through redistribution or through parasitical relationship through coercive mandates.

[As an aside the problem of individual unproductivity can be handled through the family or the individual’s networks or the community, whereas the problems of aggression can be dealt with by domestic law]

So the above account simply shows that the average person in Laos has opted for the former which has brought them this newfound prosperity.

Whereas the political leaders of Laos has gradually been relenting to the forces of globalization as revealed by a surging merchandise trade as % of GDP which has passed the 2006 highs (chart from World Bank)

Finally the consensus also forgets that social policies (taxes, regulations, bureaucracy, interventions and etc…) have never been neutral, as these policies greatly affects of influences people’s incentives from which they operate on for survival.

The seeming advantage of natural resources, demographics and geographic factors are in reality subordinate to social policies that promotes private property rights principally channeled through voluntary exchanges and protected by the rule of law.

The old saw “money goes to where it is best treated” seems highly relevant to the economic freedom story of Laos

World Economic Trend: Mercantilism or Globalization?

To paraphrase a recent comment I received from a mercantilist: Because of the US dollar standard, mercantilism have been more prevalent today.

It is easy to dismiss such an argument as post hoc fallacy since two distinctive variables have been made to function as causally related. Nevertheless let us see from a few charts and graphs whether this claim has validity, even if we exclude the role of the US dollar.

To rephrase the issue: Has the world economic trend been more about mercantilism or globalization?

According to Google’s Public Data World merchandise trade as % of GDP has ballooned from a little less than 20% in 1960s to about nearly half of the world's economy today.

Even trade balance of services, again from Google Public Data, based on OECD economies volume has leapt sixfold since 1996.

Above is the breakdown of global trade per sector in 2010 (World Trade Organization)

Add to the current dynamic the dominance of intra-region trade

One major reason for the surge in global trading activities has been due to major moves to LIBERALIZE trade via substantial reductions tariffs which came from Regional Trade Agreement (RTA), Multilateral Trade Negotiations (MTN) and or even unilateralism (WTO)

Bilateral investment treaties peaked in 1995 but the effects of these are still being felt today through massive growth in cross border investments

While there have been some protectionist pressures as consequence to the financial crisis of 2008, generally speaking trade liberalization has been minimally affected.

From IMF Finance 

The number of new protectionist actions peaked in the first quarter of 2009 and bottomed in the third quarter of 2010. However, recent GTA data suggest that protectionist measures are increasing again; protectionist actions in the third quarter of 2011 alone were as high as in the worst periods of 2009 (Evenett, 2011).

The Group of 20 (G20) advanced and emerging economies account for most of the trade measures, most of which did not involve tariffs, imposed since 2008. There has been no significant increase in the overall use of tariffs or temporary trade barriers, such as antidumping measures, aimed at assisting local firms injured by import competition (Bown, 2011). Such measures affected only about 2 percent of world trade (Kee, Neagu, and Nicita, 2010; WTO, 2011). The trend of gradual tariff liberalization observed since the mid-1990s has not been affected

The World Trade Organization (WTO) notes of the recent increases in Non-Tariff Measures (NTM). But these have been based on technical barriers to trade (TBT) regarding standards for manufactured goods and sanitary and phytosanitary (SPS) or measures concerning food safety and animal/plant health, and partly domestic regulation in services which have hardly been about restricting competition.

From the WTO,

“I think it is a good time for the WTO to have a closer look at non-tariff measures (NTMs)”, said WTO Director-General Pascal Lamy, at the launch of the Report. “A clear trend has emerged in which NTMs are less about shielding producers from import competition and more about the attainment of a broad range of public policy objectives. The new NTMs, typically SPS and TBT measures but also domestic regulation in services, address concerns over health, safety, environmental quality and other social imperatives. The challenge is to manage a wider set of policy preferences without undermining those preferences or allowing them to become competitiveness concerns that unnecessarily frustrate trade.”

The above trends seems quite clear. Globalization has been the dominant theme of the world economy over the past decades, regardless or in spite of the role of the US dollar.

Now of course, events of the past may not extrapolate to the future. 

Bottom line: The religion of politics makes many people see fantasies as self constructed reality.