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?

Bullish Signals from the Recent Rally

``To profit from good advice requires more wisdom than to give it."- Wilson Mizner (1876-1933), US Screenwriter

One thing inspiring about the present rally is that internal sentiment and some technical indicators appear to have turned bullish.

As figure 4 shows, two patterns seen in the Phisix chart formed for about a year manifests of two bullish formations, particularly the ascending triangle coupled with a “rounding bottom”.

Since both bullish formations have been at work for about a year, this can be reckoned as “intensively” bullish, which means that if a breakout ensues, the pattern can lead the Phisix to test 2,530 levels! The estimate is arrived from measuring the bottom of the chart to the present resistance levels applied on the upside from the resistance levels.

Indeed such outlook can be quite exciting, however, one should be reminded that charts can only be used as a guidepost to measure the psychology of the investors/market and are NOT foolproof! Second is that if indeed a breakout follows, it means that the Phisix may test the estimated level for a period of time, similar to the duration of its formation, which may span from one year or even possibly more.

Now of course, such an outlook means adopting the right strategies when and if the Phisix does break the 2,172 resistance levels. Past performance is no guarantee that the future outcome will be similar, as in the case of PLDT, measuring its ALPHA (measurement of stock performance beyond its Beta) through Figure 5, shows that PLDT during the initial stages of the Phisix run in 2003-2004 had greatly outperformed the Phisix.

Figure 5: Measuring PLDT’s Alpha

Today, PLDT still outperforms the Phisix but much to a lesser degree, as shown by the angles of the two disparate trend lines. This means that either PLDT will pick up its momentum and lead the Phisix anew or a coming breakout would come from a broader participation from other heavyweights.

As mentioned in the past, outperformance comes with “speculative issues” as local investors turns optimistic, the tendency is to pile on broadmarket issues rather than on the heavyweights.

And signs are on the wall. During the past attempts of the Phisix to the resistance levels, most second or third tier issues that were having an upside momentum have been stalled by sellers waiting at the wings at each of the issue’s resistance levels. In short, most issues failed to fulfill a breakout.

Last week, I have noted of several ‘successful’ breakouts on the broadmarket which could mean that local investors could be indeed turning bullish, such as Cebu Holdings Inc. (+15.78%), Keppel Philippine Marine (+28.57%), Steniel Manufacturing (+59%), MRC Allied (+65.85%), Filinvest Development Corp (+27.16%), International Exchange Bank (+7.5%) and Paxys Inc. (12.328%).

Finally as a matter of market internals, the breadth had a marked substantial improvement with advancing issues dominating daily activities (even on Friday’s decline). Moreover, as initially stated, foreign capital flows remained significantly positive at P 888.835 million, with inflows seen in the broadmarket while foreign transactions represented about 61% of cumulative turnover.

Obnoxious politics aside, the Phisix is now about 40 points away from its resistance and may consolidate first or move ahead to test its one year high soon. Of course, if the political equation changes (with a violent overthrow of the present government), and if any exogenous blowouts occur (abovementioned risks)...all bets are off. Momentum for the moment is in favor of the bulls.

Personality Based Politics and The Acceptance of Income Disparity

``To say that you're going to have social justice means you're going to have to concentrate power in the hands of some small group of people to override rules, and standards, and so forth. And people do not see that that's more dangerous than the injustice that they're trying to wipe out." Thomas Sowell, columnist, Townhall.com

Obviously, this is a clear case of shooting ourselves in the foot. While one may argue correctly, using present values, that economic gains have not filtered to the masses and that the financial markets may not ‘entirely’ be reflective of the overall economy, signals emitted by the marketplace are usually discerned as LEADING indicators that signify a change in social mood (Robert Prechter, Elliot Wave International) and economic cycles. In short, the improvements in the marketplace could be indicative of an impending recovery or a gradually unfolding recovery in our midst.

Yes, I know, I have argued alot about liquidity driven markets, but that is precisely the point, today’s macro framework has been particularly liquidity driven, such that because the world is swimming in too much money, this has filtered into the country’s financial markets as well as into the domestic economy. Thus, our country’s recovery has been anchored on liquidity dynamics more than a structural one much like most of its contemporaries or the emerging market economy class, albeit they could be transient and dependent on the continuity of liquidity creation and intermediation.

Let us be honest to ourselves, all forms of recoveries in any aspect of our lives; be it physical, financial, emotional or spiritual, in the norm, does not come with a wink of an eye but rather through the passage of time (Of course there are exceptions to rule like winning lotteries is one).

Only to the “personality-based” politically obsessed minds can one not or refuse to see these emerging positive developments.

Personality based politics in my definition is analogous to a game of musical chairs. Under the present system of popularity and patronage derived economic opportunities and expectations for government led stimulus or more government intervention in the provision for our social needs, no amount of leadership change would successfully reform the country’s economic and financial status (as said above present gains are a matter of global liquidity dynamics rather than a structural one) ...UNLESS the populace is given the unbridled opportunities under an environment that would allow them to take the necessary risks, to fail, learn and excel in their respective fields in the open market.

Whining about social/income inequality (as seen in growing social/income inequality in US, China or other parts of the world) or mouthing egalitarian objectives conventionally seen with our leaders, politicians and their factotums are nothing but a facetious attempt to pay lip service to the public (demagogues). In reality these represent nothing but a bunch of canards...and they know or are aware about it! Nonetheless, in assuming or maintaining political power, which incidentally emanates from the myopic, gullible and fickle voting public, the political players simply have to tell or promise on what the public simply wants to hear (perpetuating these untruths)!

Yet the quest and struggle for political power is simply so compelling because it practically is all about Spending Other People’s Money (SOPM)! Everybody seems to have their ‘rightful’ concept about governance, or bluntly said, how to spend someone else’s money...except theirs. It seems that hardly anyone realizes that more laws equates to more budget or spending, yet none of the local analysts/experts or ‘self -righteous reformers’ have ever parleyed on the correlation of the du jour word of “corruption” to the relative size of government. Everybody seems to be agog with the fallacious inferences and associations of the virtuous aspects of governance (SOPM) while IGNORING on the structural ones.

In essence, the world is simply never equal. Borrowing the sagacious words of Gavekal Research, from their book Our Brave New World (emphasis mine)...

`` The acceptance of income disparity is probably the hardest thing to achieve in the current political structure of most countries. Why? Because most countries counterpoise the ‘social’ to the ‘unequal’ and strive to avoid wide income disparities.

`` But the refusal to accept income disparities is very destructive. Inherently, it implies that capital is taken from where it is efficient and generating higher returns and distributed where it is not. Such a course of action can only lead to an improverishment of the greater society; and when the greater society gets poorer, it is the poorest members who suffer the most. Time and again, this has been the experience of socialism.

`` Trying to prevent the growth of income disparities is also denying an important economic reality: income disparities are a tremendously creative force. As Thorstein Veblen showed in the Theory of the Leisure Class, one of the main motors of capitalism is the desire for conspicuous consumption; or as popular knowledge calls it, the wish to keep up with the Jones’. If there are no Jones to keep up with, why get out of bed in the morning?”