Philippine Mining Index; We’ve Only Just Begun!

``The best investment opportunities come from an asset class where those who know it best, love it least, because they have been disappointed most.” Donald Coxe, BMO Financial Group

I smell sweet absolute vindication. Since my Rip Van Winkle in Gold series in 2003, I have fulfilled partial projections (such as Philex “A” a mere 15 cents away from its 1987 high of 3.30), I predicted that all, if not most, previous highs of publicly listed mining issues would be topped and that the Mining index would surpass its 1987 high (see October 11 to 14, 2004 Philippine Mining Index: The March to 9,000-levels)!

Today, since the euphoria brought about by the Supreme Court’s ratification of the Mining Act in 2004, it appears that the mining index has gotten its second wind with an industry-wide charge lifting the mining index close to its 2005 high.

My conviction is that the Mining/extractives industry (including oil) would generate the best returns simply stems from the following premises:

One, it has been a global trend. The measures of the industry are on a macro aggregate basis and not on a localized scale.

Second, the industry comes from a very low base. The mining industry has been depressed by over a decade. The huge surge in commodity prices worldwide represents imbalances in the demand-supply equation that necessitates our resources to be tapped or brought on stream to meet existing deficiencies. According to an industry official, of the 9 million mineral rich hectares only 1.4% of the potential mining sites have been covered by permits! In short, risks have been basically limited relative to the commodious upside potentials.

Third, the investment cycle for the industry has just turned in to its favor or the commodity cycle is at its pristine state yet.

Aside from demand growth emanating from the rapidly expanding emerging market economies at the margin, increasing investment and speculative activity has exacerbated the present cycle, according to analyst Martin Spring, ``One indication of this is that investment in commodity index funds has risen from less than $30 billion to an estimated $80 billion currently, and is forecast to reach $140-150 billion by the end of next year.”

Moreover, there is the supply side underscored by plunging inventories, according to Donald Coxe of BMO Financial Group who writes in his Basic Points, ``The next years of this bull market will be driven by the Supply Side.”

Infrastructure bottlenecks highlighted by the shortage of manpower (mining engineers, geologists and etc.), and materials (tires, rigs, et. al), rising costs (wages, cost of materials and interest rates!), reserves coming from politically risky zones (To quote Mr. Coxe, ``As for those billions of tons of ore in potential greenfield projects, they are scattered across the globe, mostly in Third World locations, and mostly in politically risky Third World locations, such as the Congo.”), severe undercapitalization or lack of investments (According to Mr. Coxe, ``The industry is consolidating rapidly, not growing rapidly”~ which means mining and oil companies have been tethered by the ‘rear view mirror’ syndrome or the fear that “good times may not last”), environmental restrictions and political interference. What took a new mining project to open or operate in 5 years has now been extended by about 8 years. So the good times are about to continue rolling. Again quoting Donald Coxe (emphasis mine), ``At current consumption growth rates, the world is going to need major new supplies of copper, zinc, lead, tin, aluminum, and nickel by the end of this decade.”

Finally and most importantly is that the industry has the CRITICAL MASS to attract foreign investments and contribute to the development of the domestic economy. According to analyst Doug Casey, the country is ranked second in gold reserves, third in copper and sixth in chromite.

Figure 1 Philippine Mining Index and the CBOE GOX index

The Chicago Board Options Exchange Gold index (GOX) a benchmark comprising several key mining issues has been on an uptrend since end 2000, as shown in Figure 1 (Blue line and blue arrow). While the Philippine mining index has started its ascent in only at the end of 2003! In short, a THREE years lag! CBOE’s GOX has returned 5x compared to the local mining index which is up only 3x!

I got scoffed at, laughed at and ridiculed when I preached this contrarian investment theme about 3 years ago. Such denials came from some clients and friends until even last year especially after the initial bout of euphoria failed to sustain its rise. To quote IBM founder Thomas J. Watson, Jr. ``There's a fine line between eccentrics and geniuses. If you're a little ahead of your time, you're an eccentric, and if you're too late, you're a failure, but if you hit it right on the head, you're a genius." It certainly proved difficult to be seen as an eccentric, when the public’s inclination is to assume of the short term perspective.

Albeit, I understand how investment mavens Jim Rogers and Dr. Marc Faber felt, having preached the same theme earlier or since the late 90s (Warren Buffett bought his 130 million ounces of silver in 1998!). Now it looks as if it is payback time, as the commodity theme gets conspicuously diffused into the public psyche!

Figure 2: From Denial to Gradual Acceptance?

I have been saying that the financial markets are fundamentally psychological more than anything else, such that investment themes permeate through the public via several stages. The boom bust stage cycle as defined by billionaire philanthropist George Soros as 1) The unrecognized trend, 2) The beginning of a self-reinforcing process, 3) The successful test, 4) The growing conviction, resulting in a widening divergence between reality and expectations, 5) The flaw in perceptions, 6) The climax and finally 7) A self-reinforcing process in the opposite direction.

With indicators such as business headlines ``Stocks at Par with Gold price trend”, faddish analysts taking up the Bullish outright “buy” calls from previously “speculative” buy calls on mining issues and local buying amidst foreign selling yet propping up price levels to 1987 highs (particularly in Philex Mining), it appears that we are in at the stage 2 “The beginning of a self-reinforcing process” gradating into the stage 3 “The successful test” of the Soros cycle. In short, from the fringe our investment theme has slowly evolved to the social convention or is, in other words, turning mainstream! From one the songs of the late Karen Carpenter, We’ve only just begun!

Figure 2 shows of the recent major or deep corrections in the mining index (blue arrows) have signified the massive denials by the public on the recrudescence of the once downtrodden industry. Yet despite such rabid denials your prudent analyst/investor remained steadfast, as British author Aldous Huxley once wrote, “Facts do not cease to exist because they are ignored.”

Today, the technical picture manifests of a gradual improvement in the investing public psyche as exhibited by our favorite pattern the “J.LO” bottom (named after actress Jennifer Lopez). Moreover, corrections or counter trend moves has been to a lesser degree compared to the previous.

Figure 3: The Big Picture! Massive JLOs!

Figure 3 shows of the Mining index since 1958. The highest the Mining index has reached was in 1987, which paradoxically was counter to the rapidly declining prices of commodities then. Today, the rise of the mining index has coincided with the spectacular jump in commodity prices see Figure 4, meaning that the global investing dynamics has filtered into the pricing of domestic mining stocks in anticipation of its renascence.

And since commodities operate under an investment cycle like any other industries, its record high prices driven by asymmetries in the marketplace are bound to remain in place for sometime; possibly a decade or more, although NOT in a straight line.

Some market participants or prospective participants deem analysts ‘can read the future’ or the ‘investing public’s mind’. Conventionally, they ask for a specific date or time frame, normally a short time at that, when considering to jump into the marketplace. Let it be known that we (analysts) do not control the market and are not clairvoyant nor are we psychic; we operate on the realm of probabilities and possibilities.

Figure 4: courtesy of Martin Weiss, Money and Markets

Finally, I’d like to warn you that the frenzied rally in the mining index indicates that some index members, in particular the apparent leader Philex Mining has been into deep overbought territories for sometime and could see some correction anytime soon. With faddish analysts throwing a buy call on the issue, we take such signs of bullishness as indicators of near ‘tops’. One analyst in the print media made a similar call last January 25^th 2005, in the heat of the Mining run spawned by the Supreme Court ruling and in less than a month the mining index collapsed following such euphoria.

While I remain bullish on the industry over the long term, there would be a better time to accumulate at much attractive prices than today. BMO’s Donald Coxe makes a worthwhile recommendation to the public (emphasis mine), ``The longer-lived the reserves, the more a company is worth. A deep value investor should not price these stocks primarily on their current p/e ratios, but on the values deep in the ground that will be realized over coming years—and coming generations.”

Figure 5: Courtesy of Adam Hamilton’s Zealllc.com

As a final reminder, contrary to the pabulum spouted by conventional analysts, mining stocks are less valued by P/E ratios as shown by sky high P/E valuations in Figure 5 by mining stocks components of the Amex Gold bugs HUI and the Philadelphia Gold Silver XAU, but by operating leverages and reserves.

Have a great holiday!

CBS Market Watch: Gold hits $600 an ounce

Gold hits a milestone!

NEW YORK (MarketWatch) -- Gold futures powered higher early Thursday, setting a fresh 25-year high at $600 an ounce, pulling other metals to multiyear levels and helping copper to a new all-time high.

"Gold is exploding and silver isn't far behind," said Kevin Kerr, trader and editor of Global Resources Trader, a newsletter published by MarketWatch, the publisher of this report.

Gold for June delivery rose to $600 an ounce in official trade on the New York Mercantile Exchange, having earlier hit a high of $601.90 in electronic trade.

Silver traded at a new 22-year high of $12.01 an ounce, after peaking at $12.08 in electronic trade.

The metal has rallied sharply in recent weeks as excitement has built about the pending launch of a silver exchange-traded fund, that's expected to boost physical demand for the metal.

Copper was last up 2.20 cents to $2.618 a pound, after trading at a new record of $2.621 in official trade and $2.64 a pound in electronic trade.

Platinum rose $17.40 to $1,098 an ounce and palladium was up $13.35 at $356 an ounce.

The ``Philippine Mining Industry's Inevitable Rise” Watch

I have recently argued that geopolitical developments would be shaped by resource based securitization. Some events leading towards the validation of these assumptions...

1. Recently, Zimbabwe has attempted to nationalize its mining industry. According to a report by Diamonds.net, ``Under intense pressure from South Africa's mining houses and the International Monetary Fund (IMF,) the Zimbabwe government has been forced to backtrack on its proposal to nationalize mines in the country.”

2. According to a Bloomberg report, Cia. Vale do Rio Doce, the world's largest iron-ore producer said the amount of mining exploration and investment in South America may be overtaken by spending in Asia as companies are lured by the prospect of bigger finds. Asia accounted for 17 percent of global investment in mining exploration last year, from 8.7 percent in 2001, Fabio Masotti, Vale's head of exploration for Asia and Oceania, said at the three-day Annual Asia Mining Congress in Singapore. This increase occurred in the face of ``restrictive mining laws, red tape, social and economic instability'' in many Asian countries, Masotti said in a speech. Rio de Janeiro-based Vale has budgeted $180 million for exploration this year, with more than half of it to be spent outside Brazil, said Masotti.

3. Mexico might even attempt at denationalizing its oil industry! According to this Bloomberg report, ``Mexico risks a drop in oil output unless lawmakers allow for private investment in the industry, according to the chief executive officer of state-owned Petroleos Mexicanos, the world's third-largest producer.

``Pemex, as the company is known, will leave billions of barrels untapped in deep Gulf of Mexico waters and in a costly onshore field without partners to provide technology and share risks, said Pemex CEO Luis Ramirez Corzo. Mexican law allows only Pemex to extract crude and natural gas and to refine oil, barring companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc from investing in the industry.

``The country since 1979 has pumped the majority of its oil from Cantarell, the world's second-biggest field by production, and reinvested little on other deposits, Ramirez said. With Cantarell supply declining for the first time this year, Pemex must emulate state-controlled companies such as Norway's Statoil ASA to drill in more remote areas.

``We're worried,'' Ramirez said in an interview from the 44th floor of Pemex's Mexico City headquarters. ``The problem is that today we have to begin making decisions that affect us 10 years from now.''

Listen To Your Barber On Higher Rates and Commodity Prices!

``If you don't know where you're going, you'll end up somewhere else.” Yogi Bera

Figure 4: Since 2004 Philippine (ROP) Sovereign Instruments have Soared!

A client asked me last week whether it would be more prudent to invest in bank products which invested mainly on ROPs instruments yielding a rate in the high 10s in percentage or the stock market. Naturally, I would have to admit that considering the equities market as my métier, I would be biased to answer in favor of the latter. As Warren Buffett once remarked, ``Never ask a barber if you need a haircut.”

Figure 4 courtesy of again of Asianbondsonline.com tells us that since 2004, benchmark coupon rates for ROPs have collapsed by about 40%. In short, ROPs have been on a BULL MARKET! Yet, much of these improvements I have likewise attributed to overflowing money and credit supply or the inflationary cycle adopted by global central banks since 2003 (discussed extensively in our November 14 to 18, 2005 Inflation Cycle A Pivotal Element to Global Capital Flows). I have argued that global investors has lumped the Philippines as part of the emerging market class, such that investing on the aforementioned rubric means a spillover to Philippine assets, thereby contributing to the conspicuous inflation of asset prices.

Now times have changed. Global central banks led by the US Federal Reserves has began to siphon off liquidity, since 2004, from the global financial marketplace as it hiked its interbank rate for the 15^th time to 4.75%. To wit, we have also reported of the recent rate hike undertaken by the Euro last December (with more forthcoming) and the end of the accommodative money policies in Japan with the end of the Quantitative Easing (QE) (see March 6 to 10 Rising US Yields; Japan’s End to Quantitative Easing).

In essence, we have concurrently a global trend of rising interest rates which does not bode well for our peso sovereign debt class. The Philippine 10-year US denominated instruments is merely 230.9 basis points away at 7.159% from its US 10-year counterpart at 4.85%. Such low spreads makes it unlikely for the Peso debt instruments to surge further, especially under the environs of constricting monetary conditions.

I have been expecting a divergence in the price performance among asset classes however since the Fed flushed the world with excess dollars in 2003, almost in synchronicity, global asset prices have risen across all spectrums.

Today, as the scaffolds of liquidity are gradually being withdrawn; it could be observed among the financial marketplace that some tolls are being exacted not in the equity or commodity markets but in the bond markets...

Figure 5: Lehman Bond Composite (Global) and the Salomon Brothers Emerging Market Debt Fund Inc.

As shown in figure 5 courtesy of stockcharts.com the Lehman Bond Composite – Global (red line), representative benchmark of global bonds and Salomon Brothers Emerging Markets Debt Fund Inc (black line) for emerging markets have been on a recent decline.

Figure 6: Dow Jones Corporate Bond Index (red line) and the Morgan Stanley Dean Witter U.S. Government Securities Trust (black line)

And it is almost across the board, as shown in Figure 6 Morgan Stanley Dean Witter U.S. Government Securities Trust, representative of US sovereign debt as well as the Dow Jones Corporate Bond Index, representative of corporate debts.

Moreover, if government trends are of any indication, the recent surprise delivered by Iceland’s central bank to raise interest rates by three quarters of percentage point may herald to similar activities in the financial marketplace, something unexpected by the conventional investors.

Since 2003, I have stated that rising gold prices have not been consistent with rising equity and bond prices as gold prices signify an increased degree of uncertainty (geopolitics, monetary, financial, or economic stress) and/or hallmarks of higher inflationary environment.

Figure 7 shows (courtesy of kitco.com and economagic.com) the correlation of rising gold prices in the past in tandem with rising interest rates (as shown in the lower window).

The recent surge of gold prices to a 25-year high alongside precious metal sibling silver, as well as record highs of other metals as copper, zinc (see Figure 8) and platinum, and even sugar to a 24 year high, has been accompanied by a breakout of the 10 year yield of the benchmark US Treasuries to its highest level since May 2004.

If past were to assimilate itself then we are off into seeing higher rates conflate with higher commodity prices (see Figure 9 represented by the CRB Reuters Index).

While bonds may not be the place to be, as higher inflation rates erodes yields or locking in at low rates would translate to capital losses, higher commodity prices equates to higher reserves valuation and increase in earnings for the extractive industries. Further, if eroding purchasing power brought about by monetary inflation is concerned, amidst a “stagflationary” environment, then in parallel to commodities, hard assets could be the place to be. In short, under the Philippine setting it’s best to stay invested with short term bonds or preferably long the stockmarket (mostly in real estate and mining/oil).

I guess its time to listen to your barber and have that haircut!

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?