Phisix Breaks Out! It’s the Peso, stupid

``Efforts and courage are not enough without purpose and direction." - John F. Kennedy

After a long and tedious wait, finally that much awaited breakout!

Figure 1 Phisix Breakouts out of One Year Consolidation

Surging 2.7% for the week, the Philippine benchmark index posted cumulative gains of a noteworthy 5% over two consecutive weeks, to scale a 6 year high as of Friday’s close. The advances over the previous ten sessions represent the bulk of the 5.34% year-to-date advance for the Phisix.

Well, this isn’t exactly a surprising development since we have repeatedly delved on the possibility of this outcome over the past weeks, if not since late last year (see November 7 to 11 Market Timing: Preparing For the Christmas Rally). We have even taken as cue the movements of Indonesia’s JKSE (+.47%) in the previous edition!

Even amidst the most recent battering of the Phisix coincidental to the declines among contemporary emerging market indices, my forecasts for the Phisix remained steadfastly for the breakout, confidently banking on market cycles as basis for such gritty projections. As to whether the present breakout could simply be a headfake or the next leg up remains to be seen, however, signs are predominantly indicative for the latter to occur.

In contrast to the previous breakouts, which had been primarily driven by foreign money, today’s watermark activities could be characterized as being driven by a combination of more aggressive local investors and an equally optimistic foreign money. In fact, market internals reveal that the scope of foreign buying activities over the broadmarket has reached a March 2005 high! As an aside, net foreign buying constituted about 20% of accrued turnover at Php 1.273 billion.

It is safe to infer that the money flows from overseas investors into the domestic market could be consistent with the activities in the emerging market class. For the week that ended on March 22^nd, according to Amgdata.com, ``Excluding ETF activity, International Equity funds report net inflows ($854 Mil) to all Emerging and Developed regions.” Moreover, most Asian bourses registered advances for the week except for Sri Lanka, Thailand, Taiwan, South Korea and Hong Kong.

During the previous outlooks, I mentioned that the formative upside trends or the “successful breakouts” (see February 27 to March 3 edition, Bullish Signals from the Recent Rally) over the broadmarket indicated a psychological reversal by the locals whom have been sparingly bullish over the present advance cycle which incepted in the second quarter of 2003. The burst of activities from local investors have been conspicuously observed during the peak cycle of last year’s run, i.e. February to March.

Even prior to the present breakout, evidences abound that local investors’ activities have actually ramped up!

Figure 2: Ascending Number of Trades

As shown in Figure 2, the number of trades or the transactions consummated daily have been building up since the last quarter of 2005 until the present. The overall trend has likewise been on an upside since 2003. Please note that the spike or the record high number of transactions was recorded during the zenith of last year’s run from February to March. Present momentum tells us that we are about halfway from the previous peak. This suggests that as the market scales higher, activities are likely to reach or even surpass previous highs.

Figure 3: Issues Traded on an Uptrend

On a similar plane, we can observe that the number issues traded daily in the market also on an uptrend for both the long term (since 2003) and short term perspective (mid 2005) as shown in Figure 3 (the red arrow). Again similar to the number of trades, activities during the last quarter of 2005 have been markedly higher than the base prior to the February to March 2005 run up and continue to accelerate. Again, expect the number of traded issues to increase in magnitude or even possibly surpass the previous record highs as the Phisix lofts to higher grounds.

Now against the claptrap spouted by most conventional mainstream analysts/experts of improving micro aspects (there is no dispute that the micro environs has emitted signs of improvement but has not served as the driver!), your prudent investor analyst has pointed to the higher peso as the pivotal impetus for the psychological shift of the local investors as to being “positive” on the domestic market.

Again, using Bastiat’s law of the Unseen or in the words of the illustrious scientist Albert Einstein ``Not everything that counts can be counted and not everything that can be counted, counts”.

Figure 4: Peso’s Appreciation In September Coincides with Acceleration of Local activities

Now what appears to really count among the sundry of countable factors is that as the Philippine currency, the Peso begun its appreciation in September, activities in the market by the local investors, as demonstrated by the confluence of the rising number of traded issues and the daily transactions, have distinctively been on an uptick over the same period! In other words, the rising Peso has coincided with the growing activities of local investors over at the PSE.

The distinguished Austrian Economist Ludwig Von Mises argued that ``Human action is purposeful behavior” which means that people are generally moved by the judgments of value aiming at a definite end or that people act to attain their “perceived” interests. The Philippine Stock Exchange or the local equities market has evidently become an alternative avenue for local investors whom have found investing in the dollar denominated assets as a less appealing proposition. In short, local investors have been simply chasing for yields. Elementary my dear Watson!

One must remember that throughout the past decade, as the Peso depreciated amidst financial and economic turmoil, local investors have fundamentally fled from investing in local (peso) assets or (business) ventures and took the US dollar route as a haven for their savings. This essentially is known as “Capital Flight”.

In the past I mentioned that the domestic banking sector’s Foreign Currency Deposit Unit (FCDU) has been reportedly loaded with some $10.4 billion worth of dollar denominated investments lodged overseas by local resident investors, according to the Bangko Sentral ng Pilipinas as reported by the Philippine Daily Inquirer.

As the prospects of a firming peso/falling dollar and higher yielding rates for the domestic money market or fixed income units relative to US dollar based units gets to be entrenched upon the Filipino investor’s psyche, the odds are for a trend reversal of the past “Capital Flight”. You can expect a gradual repatriation of that $10.4 billion worth of locally owned dollar assets back to Philippine shores. Investments are likely to grow manifold in the form of expanded volume for the PSE (direction too!) as well as domestic fixed income securities, real estate and/or myriad business ventures or direct investments. This, notwithstanding, does not incorporate the unreported monies stashed overseas!

The logic is quite simple: Would you remain holding on to the US dollar or US dollar denominated assets when returns are falling? Would you not invest on a higher yielding currency?

So what your mainstream analysts deduces as micro improvements acting as drivers of the markets are essentially the consequences of ‘causality’. To reword the famous quote of author Harold Coffin, ``It’s the Peso, stupid.”

Because our goal is to always be ahead of the curve, understanding the drivers of the market is our main concern and acting on investments that are expected to respond or react to such trends and NOT training our eyes on relative effects. As the prominent economist John Maynard Keynes once said, ``Successful investing is anticipating the anticipations of others." We act on the anticipation of an emerging trend or surf on an existing wave/trend.

Again let me remind you that this is seen in the prism or through the looking glass of the local investors.

In essence, the rising peso has certainly provided the subliminal stimulus for local investors to ante up on the domestic equities market using news or current events as rationalization for such activities. As for the foreign money, it’s all about global liquidity and sentiment (STILL!).

Philippine Mining Industry’s Inevitable Rise

Philippine President GM Arroyo’s move to lend an ear to the Catholic Bishops to pave way for a “review” of the mining statute has elicited some concerns among some investors.

The Catholic Church has been openly opposed to the revival of the mining sector due to “environmental” concerns and this, in my view, has prompted several prelates to explicitly call for her resignation using the “legitimacy” issue as camouflage.

PGMA’s resolve to open communication channels with the influential Catholic Church is obviously a political ploy to “damage control” or reverse the declining tide of her political stock.

Nonetheless, considering the cash strapped position of the government plus the potential revenues it can generate, aside from broadening influence of resource-based geopolitics, the renaissance of the mining industry will unlikely be forestalled by the whimsical and baseless impositions of the myopic, self-righteous and socialist leaning Catholic Bishops.

The emerging risks in the mining industry has been on the aspects of “nationalization” (Venezuela, Bolivia, Zimbabwe), and/or increase in royalties or government share on mining revenues (Chile). While we have seen similar protests lodged by the Church in several Latin American countries, governments have not curtailed mining activities but instead increased its participation by either increasing equity on projects or demanding higher take on revenues. In short, it’s all about money.

In the Philippines, there is “nothing to nationalize” or nowhere to demand for an increase in shares of revenues simply because there is hardly an industry to speak of. In a speech delivered to the Asian Mining Congress in 2004 former Department of Environment and Natural Resources (DENR) Michael Defensor noted that there are ``only two (2) big mines in operation. Added to these are three (3) medium-scale chromite mines, four (4) medium-scale nickel mines and five (5) medium-scale gold mines with fifteen (15) cement plants and quarries at work.”

On the revenue side, when one speaks of generating US$61.4 million from excise taxes, and US$432 million in Corporate taxes annually, such magnitude makes the industry too compelling to ignore as to write it off for the sake of unjustified bugaboos (Mining admittedly has some negative environmental impacts but doesn’t “destroy life”~ pure bunk!). In essence, given the resource rich potentials of the country, no matter who sits as President (even a Prelate!) will be compelled to harness the revival of the industry for financial and economic purposes. The $64 question is, how it would be done (open to foreign investors, or government instituted).

Moreover there is the issue of geopolitics.

Rising commodity prices, which have been the outgrowth of investment and macroeconomic cycles compounded by the ramifications from collective government policies, is here to stay for sometime. Some market experts have even been suggesting that the present cycle could even last until 2050 based on the Kondratieff (Soviet economist Nikolai Kondratieff) rising long wave cycle count which spans from 45 to 60 years peak to peak! Analyst Martin Spring quotes Kenneth Rogoff, professor of economics at Harvard, “For at least the next 50 to 75 years, prices for many natural resources are headed up.”

This means that securing resources as oil, natural gas, copper, gold, silver, molybdenum to soft commodities (agriculture) will increasingly be the driving force behind geopolitics!

In the words of Dr. Marc Faber (emphasis mine), ``when markets are glutted and over-supplied, no one is going to fight in order to satisfy his demand. Conversely, when markets are characterised by acute shortages, people will fight and go to war in order to secure their required supplies, particularly when the shortages that might arise or that have already arisen threaten the physical and economic survival of the groups or countries involved.”

What this means is that there would be intense pressures from extraneous forces to revive our resource based industries such as the mining industry, (whether the Catholic Bishops like it or not). For example, I expect the Chinese government to ante up their presence towards shaping local politics (e.g. the aborted attempt to buyout UNOCAL by China’s CNOOC was a purported backdoor play to Asia’s energy resources, the current $400 million North Rail project from Caloocan to Malolos could be one of the icebreakers). To the extent that chronic shortages of a particular commodity could possibly pose as a casus belli (for an invasion)! In short, the revival the mining industry is simply inevitable for as long as current commodity dynamics prevail. Either we will open the industry and benefit from it through trade, or someone will eventually do it for us.

Finally, we should let the market speak for itself. While the present developments may give an investor anxiety over the consistency of policies adopted by the present regime, the financial markets will tell us whether these concerns are treading on valid grounds based on the collective psychology of investors represented by price values. Since the announcement of PGMA to “review” the Mining Act, the performance of local mining companies listed abroad has been mixed, Sur American Gold soared 26.67%, Mindoro Resoures down -3.66%, Philex gold surged 37.5%, TVI Pacific fell 6.67% while Pearl Asian Mining slumped 33.33%.

Figure 1: Philippine Mining Index

Meanwhile the Philippine Mining & Oil Index posted a hefty 7.86% advance this week, the best performer among sectoral indices in the Philippine Stock Exchange as shown in Figure 1. As far as the markets are concerned, there are certainly no strains of a policy reversal.

PricewaterhouseCoopers on Potentials of the E7

``The entrepreneur always searches for change, responds to it, and exploits it as an opportunity."- Peter F. Drucker

Unless the country tacks into the fold of a Cuba or North Korea, as suggested by some xenophobic but influential segments of the society, (aside from the politically fixated minds), the seismic changes unfolding amidst the macroeconomic and geopolitical front is truly a wonder to behold if the trend should persists. Aside from Goldman Sachs, an investment firm that predicted the rise of economic powers of the ``BRIC: Brazil Russia India and China” to supplant the major western powers, now we have PricewaterhouseCoopers predicting on the same plane that (emphasize mine) ``By the year 2050, what the report calls the ‘E7’ economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will have outstripped the current G7 (United States, Japan, Germany, UK, France, Italy and Canada) by between 25%, when comparing Gross Domestic Product (GDP) using market exchange rates, and 75%, when using purchasing power parity (PPP) exchange rates.”

The two tables from PricewaterhouseCoopers (United Kingdom) shows of the following: Table 1 (projected growth rates from year 2005) and Table 2 (projected size of economies relative to the United States).

Table 1: Projected real growth in GDP, income per capita and working age population: 2005-50 (%pa)

Country	GDP in US $ terms	GDP in domestic currency or at PPPs	GDP per capita at PPPs	Working age population
India	7.6	5.2	4.3	0.9
Indonesia	7.3	4.8	4.2	0.4
China	6.3	3.9	3.8	-0.4
Turkey	5.6	4.2	3.4	0.6
Brazil	5.4	3.9	3.2	0.5
Mexico	4.8	3.9	3.3	0.4
Russia	4.6	2.7	3.3	-1.1
S. Korea	3.3	2.4	2.6	-0.9
Canada	2.6	2.6	1.9	0.2
Australia	2.6	2.7	2.0	0.4
US	2.4	2.4	1.8	0.4
Spain	2.3	2.2	2.2	-0.7
UK	1.9	2.2	2.0	0.0
France	1.9	2.2	2.1	-0.3
Italy	1.5	1.6	1.9	-0.9
Germany	1.5	1.8	1.9	-0.5
Japan	1.2	1.6	1.9	-0.9

Source: PricewaterhouseCoopers LLP GDP growth estimates. Working age population growth from the UN.

Table B: Projected relative size of economies in 2005 and 2050 (US = 100)

Country (indices with US = 100)	GDP at market exchange rates in US $ terms		GDP in PPP terms
	2005	2050	2005	2050
US	100	100	100	100
Japan	39	23	32	23
Germany	23	15	20	15
China	18	94	76	143
UK	18	15	16	15
France	17	13	15	13
Italy	14	10	14	10
Spain	9	8	9	8
Canada	8	9	9	9
India	6	58	30	100
Korea	6	8	9	8
Mexico	6	17	9	17
Australia	5	6	5	6
Brazil	5	20	13	25
Russia	5	13	12	14
Turkey	3	10	5	10
Indonesia	2	19	7	19

Source: PricewaterhouseCoopers LLP estimates (rounded to nearest percentage point)

Of course these are nothing more than assumptions with immense probabilities of deviations from the embedded very long-term forecasts, akin to those institutions or buyers of sovereign 50-year bonds (whom are projecting more of the past and present to the future).

However, the essential point driven by PricewaterhouseCoopers is that the critical sources of the largest growth potentials come from Emerging markets rather developed ones, characterized by the confluence of a large dynamic growing populations, are resource rich and have been capitalizing from the ongoing wealth and technology transfer as the global division of labor gets to be highlighted, on the backdrop of increasing trends of globalization, or economic growth on more trade and financial integration (unless subverted by protectionist policies).

Investors looking for YIELD outperformance should therefore seriously look at or consider the prospects of investing in emerging markets as ours. It is probably one reason why foreign investments constitute a majority of the activities in the Phisix despite the mephitic political atmosphere. If the Indonesia can get noticed, why shouldn’t we? Or simply, how can the Philippines be NOT a part of the growth dynamics of its sizzling hot neighbors unless it adopts “curtain wall” policies?