Emerging Markets Analysis – Friday, May 13, 2016

Country Focus: Philippines


This emerging markets analysis examines the recent performance of Philippine equities and its outlook, with an emphasis on sector analysis, and provides some thoughts on stock selection from the perspective of an analyst/trader that utilizes fundamental, technical, quantitative, and intermarket analyses. Lastly, a Philippine Sector Dashboard is provided.

Philippine Presidential Election Results

After much anticipation, the Philippine presidential elections completed relatively smoothly. To be sure, reports of vote buying and voting equipment not working at some stations came in, but absent was Wild West, nation-wide violence that seems to mar some developing country democratic elections. By all accounts, Rodrigo Duterte, the seven-term mayor of Davao City (fourth most populace city in the Philippines), will be the 16th president-elect of the Republic of the Philippines. Running on a platform of zero tolerance, anti-corruption and anti-crime, Duterte, nicknamed “Digong”, “Duterte Harry”, and “The Punisher”, has vowed to eliminate drug traffickers, criminals, gang members and other perceived “lawless elements”. While crime reduction is always a positive, the former lawyer’s plans for the economy, fiscal policy, monetary policy, trade policy, diplomatic policy, and geopolitical policy are among the list of items that investors will be most focused on.

PSEi: Up, Up and Away!

As discussed previously, the blue-chip PSEi has formed a flag-pattern starting in March, trading in a band between 7376 and 7160 (Chart 2). As a continuing indicator, the flag suggests the PSEi would likely run to about 8600-8700 before the first significant correction. On May 11, two days after the election, price penetrated the upper resistance zone on the highest daily volume in over eight months to close at 7396 (also, an eight-month high), then fell back to 7325 on lighter volume the next day, only to jump to 7493 on May 13. If the flag/bullish trend-pattern setup holds up, price should continue its ascent, perhaps, re-testing the 7370-7380 former resistance (now support) level again, with an initial target of 7500 and a secondary target of 8000, once the 7910 May-18 2015 swing-high is taken out. Ultimately, an intermediate high of 8600-8700 would be expected, before a significant correction. Penetration of a significant swing-low would nullify the bullish trend…of course, a trailing stop loss at just below the significant swing-low would provide protection in the worst case. Unfortunately, no direct method of trading the PSEi exists, unless someone wants to buy or sell a free float market capitalization-weighted number of shares of the 30 stocks in the PSEi, cumbersome and costly (In Feb 2015, the Singapore Exchange (SGX) launched the SGX-PSE MSCI Index Futures, a USD-denominated contract which tracks the MSCI Philippines Index that includes 22 constituents representing roughly 85% of the PSE market cap). Luckily, there’s another way.

Sector Analysis and Sector Rotation Model

20160513 Chart 3
Chart 3. Sector Rotation Model. Source: John Murphy, Trading with Intermarket Analysis.

Normally, sector analysis provides a methodology to identify turns in the four-to-five year economic cycle, generally three to six months ex ante.  As a leading indicator, stocks tend to bottom and turn upwards while the economy is still struggling (and bonds usually turn several months ahead of stocks). By the time the economy enters recovery mode,  the general stock market is already racing northwards. In the sector rotation model in Chart 3, the stock market is represented by the red line, while the economy by the green line. Cyclical stocks, highly sensitive to  the economy, such as consumer discretionary and transportation shares, typically lead the recovery. This author likes to monitor selling volume of corrugated boxes (paper industry) to gauge when business activity is about to pickup (boxes are needed before any final products are actually sold and boxes for tools and heavy equipment often go first). Eventually, factories begin to turn out finished products that increases demand for intermediate goods, basic materials, and energy. However, as written ad nauseam in previous reports, continuous central bank intervention over the last decade has distorted the capital investment and business decision-making process to create a new normal environment. Nevertheless, sector rotation still does occur, but not necessarily in the neat order depicted in Chart 3.

Philippine Cyclicals Lead the Way

Difficult to tell, but cyclical stocks bottomed at the end of August (green circle in Chart 4), five months ahead of all other sectors, with the exception of utilities. Interestingly, the PSEi, property, services, industrials, mining, energy, and holding firms all reached their lows on Jan 21 (financials bottomed ten days earlier). Defensive utilities was the last sector to trough on Mar 9. As examined in a prior report (Emerging Market Analysis for April 28 2016), mining stocks (+31%) have put in a stellar performance, along with holding firms (+32%), property (+29%), and energy shares (+29%) over the last 16 weeks. In the 4-week lead up to the May 9 presidential elections, holding firms, property developers, miners, energy cos, and financials institutions bumped up 2-4% as a Duterte win seemed more probable. As several news outlets have reported, President-elect Duterte would likely entertain investments from China to help build up infrastructure. Again, stocks are the ultimate leading indicator and appear to be shouting that a construction boom is at hand.

Picking the Winners

Once desired sectors are identified, the next step is to select stocks to be added to your watchlist. As an aside, not all stocks are included, for obvious reasons, in a given sector index. Thus, often, small and medium-sized high beta stocks, not included in an index, could turn out to be multiple-baggers, high returners (5x or even 10x, to borrow a baseball analogy from Peter Lynch, the legendary manager of Fidelity’s Magellan Fund).

For each stock the fundamentals should be examined to avoid any potential landmines (senior management problems, multiple consecutive quarters of diminishing sales, declining capex to boost earnings, new reporting methodologies (especially, pertaining to revenues and inventory), new entrants and disruptive technologies, regulatory changes, supply chain problems, trade restrictions, auditor concerns, and foreign exchange rate impact, to name a few). After weeding-out the dogs, an investment/trading strategy and set-up needs to be executed that includes trade signal, confirmation, trade trigger, initial stop loss and trailing stop loss strategy, position sizing, money/risk management, exit strategy, and portfolio management (all of which, of course, is written down in your investment/trading plan and kept on your desk). Obviously, this author does not subscribe to a long-term buy-and-hope strategy, preferring a three-month to twelve-month investment horizon employing a strict, disciplined, and replicable rules-based investment/trading strategy with a library of bullish, bearish, and swing trading set-ups (and a handful of short-term quantitative momentum set-ups).

Very importantly, should new information counter the original premise for a given trade, it is imperative that risk be reduced by either exiting the trade completely (preferable for most) or partially exiting open positions and narrowing trailing stop loss orders. Also, position sizing may be the most critical feature of a well-honed trading plan – keeping loss-exposure of individual trades to 0.5%-2% of trading capital significantly reduces probability of catastrophic blow-ups (low maximum draw down), enabling you to remain in the game (all of which requires sufficient amount of initial trading capital). Finally, do not rely on specific recommendations without doing a proper investigation as risk appetite, investment horizons, and investment goals vary. Good skill!

Philippine Sector Dashboard

Property Sector

Cyclicals Sector

Services Sector

Industrials Sector

Mining Sector

Energy Sector

Utilities Sector

Financials Sector

Holding Firms Sector


Emerging Markets Analysis – Thursday, April 28, 2016

Country-Sector Focus: Philippines – Mining


This emerging markets analysis examines the primary external factors affecting commodities, Philippine mining sector with a closer look at Nickel Asia, and the outlook for Philippine equities and mining stocks from the perspective of an analyst/trader that utilizes fundamental, technical, quantitative, and intermarket analyses. Lastly, a Philippine Mining Sector Dashboard is provided.

The Party Ends When The Punch Bowl Is Removed

As the 2013 Taper Tantrum foretold, anticipation and the eventual ending of QE3 in Oct 2014 led to massive unwinding of leverage trades and re-assessment of yield-searching investments. As capital returned to the US, the greenback strengthened, boosting the USD Index from around 80 to over 100, or 25%, within eight months (Chart 1). Simultaneously, huge capital outflows from China resulted in the weakening of the renminbi as the PBOC side-stepped the dollar freight train (Chart 2). The Fed givenths and takeths away.

For the Middle Kingdom, its credit-fueled investment boom ground to a halt that, along with the appreciating USD, increased volatility, withdrawal of liquidity, excess capacity, and global slowdown in business investment, contributed to the bludgeoning of commodities. In the aftermath, China’s banking and financial system remains a major risk as rising NPLs and special mention loans (loans very likely to become non-performing) on normal on-balance sheet loans at commercial banks and imploding off-balance sheet/SIV high-interest paying wealth-management products  continue to be a prime drag on the economy as loan officers, rightly so, are hesitant to lend. China’s regulators seem to be buying time by forcing banks and financial institutions to equitize certain NPLs (swap NPLs for common stock). Should the underlying companies turn insolvent, the central government would most probably provide capital infusions to needy financial institutions and the more viable, troubled private companies become nationalized.

As discussed in previous reports, the Fed’s dovish shift in mid-Jan leads this author to believe that no interest rate hike is forthcoming in 2016 and that the next major move shall be a rate cut, ZIRP, NIRP, or QE4 (even, possibly, “helicopter money”), most likely occurring after the 2016 US presidential elections (Emerging Market Analysis for Apr 4 2016 and Market Analysis for Mar 29).

Philippine Mining Sector

Over the last 24 months Philippine miners get caught in the maelstrom, under-performing the blue chip PSEi by 30% through the recent Jan lows (black arrow, Chart 3). Those miners recognizing the global macroeconomic and monetary policy implications would have started serious hedging in Sep 2014, if not earlier, as the GreenMango PSE Mining Index penetrated below a previous swing-high in early-Sep and swing-low in late-Sep (horizontal green dashed lines, Chart 3).

Nevertheless, miners’ fortunes took a turn for the best when the Fed, after a widely anticipated rate hike in Dec, suddenly reversed stance just weeks later. The PSEi and mining stocks, after falling for eight months and upwards of twelve months, respectively, immediately bottomed-and-reversed in a “V”-shaped fashion (green dashed “V”, Chart 3). In the last 13 weeks Philippine mining stocks are up 21.8% vs PSEi 13.8% and in early Mar was outperforming blue chips by nearly 20% (Chart 4). A closer look shows that a handful of miners really attracted the eyes of investors: Global Ferronickel +78%, Nickel Asia +52%, Philex Mining +47%, Lepanto Consolidated Mining +46%, Century Peak Metals 45%, and Marcventures +45% (Chart 5, Chart 6, Chart 7).  The constituents and weightings of the GreenMango PSE Mining Index are provided at the end in DB Table 1 and DB Chart 1. Next, a glance at leading Philippine lateritic ore nickel producer Nickel Asia.

Nickel Asia

After a brisk run-up, Nickel Asia’s twin mountain top price formation in late-2014 / early 2015 gave way in the wake of the termination of QE3 (left side, Chart 8). Like all miners, Nickel Asia’s share price was hammered, falling from an intraday high of P16.11 in late-Dec 2014 to intraday low P3.30 in late-Jan 2016. For the last two months, NIKL has been range-bound between P5.85 and P5.10-P4.74 (Chart 9).

The bottoming formation currently taking place in Nickel Asia’s share price (green ellipse, Chart 8) could acquire legs as global investors once again hunt for yield and OFW remittances pick up steam following Feb’s 9% YoY rise (Emerging Market Analysis for Apr 4 2016). Furthermore, as China may likely re-peg the renminbi to the depreciating greenback to reinvigorate its exports, economy, and create inflation to give relief to its growing debt problem, commodities would get another boost.

20160428 Chart 11
Chart 10. Source: InfoMine.

For Nickel Asia, the global economic slowdown led to a glut of stainless steel (SS) product world-wide of which China has been trying to sell-off over the last 18 months, or so (upsetting local SS producers in some countries). Until the SS inventory overhang alleviates and/or SS production capacity reduces, sustainable increased demand for raw nickel will be slow to realize. Hence, LME warehouses remain flush with nickel at 415,075 MT (Chart 10), while spot nickel price sits at around $4.26 per pound (as of Apr 29), having traded above $9/lb in early 2014 and $13/lb in early 2011 (Chart 11). But, the tide seems to be turning as spot nickel is up 23% from its nearly 13-year low in early April.

Looking ahead, the LME 3-month nickel future price stands at $9180/MT, up +10% from early Apr (Chart 12), signifying increasing future demand. For China, rising demand may stem from abroad, from domestic consumption, or both. According to Stainless Steel World, China’s growing domestic consumption of SS shall outpace the country’s GDP rate of growth for years to come.

With Indonesia’s mineral export ban still in place (since Jan 2014, although some concession on nickel concentrates may be forthcoming in 2017), the Philippines and Nickel Asia, specifically, is well-positioned to pick-up any increased demand for nickel from China. Major potential competitors in New Caledonia have long-term supply contracts with South Korean and Japanese firms and South American and North American nickel miners would have additional logistics and transportation costs to contend with.

Outlook for Philippine Equities and Mining Sector Stocks

As discussed last week, since mid-Mar, a flag pattern has emerged in the PSEi signifying a rolling-stop as early-profit takers depart and new equity investors clamber aboard – note confirming volume slow down.  As a continuing indicator, the flag suggests the PSEi would likely run to about 8600-8700 before the first significant correction. Looking ahead, forceful penetration of the upper resistance zone of the flag at around 7370-7380 denotes resumption of the bullish trend. The trigger could emanate from any direction: poor Q1 US earnings announcements, more dovish Fed talk (next FOMC Meeting, Jun 14-15), major FDI announcement, strong OFW remittance inflows, relatively smooth Philippine presidential election (May 9). Two major risks facing Philippine equities and mining stocks are the perceived outcome of May’s elections and yet another flip-flop by the Fed. A down-break below 7180 on heavy volume nullifies the bullish trend set-up, requiring reassessment of the (then) current situation.

Mining companies face other factors, such as shifting USD, USDPHP exchange rate, demand for metal and mineral commodities, energy and transportation costs, and regulatory environment, to name a few. All told, should the Fed push through with an easing monetary policy, causing USD Index to break below its lower support level at 93-94 (lower green dashed line, Chart 1), that would set the stage for further greenback weakening, bringing respite to the mining sector.

So, what is the likelihood of a pick-up in natural resource commodity demand, specifically from China? According to Reuters, Chinese off-balance sheet local government financing vehicles (LGFVs) issued over 538 billion yuan ($83 billion) in bonds in Q1, including a record 287 billion yuan ($44.3 billion) in March. Much of this capital shall likely go to funding infrastructure projects as last year the government raised the debt-to-equity ratio for project financing. This can only help Philippine miners.

Nevertheless, sustainable demand for final products, consolidation or capacity reduction, and further cost reduction and inventory draw-down may still be needed to ensure that metal and mineral prices continue its recovery. Of course, should central banks lose control of the money printing apparatus to create not just moderate inflation, but high inflation, gold, silver, and other metals and minerals would truly show what a price recovery looks like. Presently, spot gold trades at around USD1250/oz  (as of Apr 27), up from USD1050/oz in Dec, or +19%, while silver has risen 25% over the same time frame to roughly USD17.25/oz.

Philippine Mining Sector Dashboard20160428 DB Table 1

DB Table 1. Source: Philippine Stock Exchange

20160428 DB Chart 1

Emerging Markets Analysis – Tuesday, April 19, 2016

Country Focus: Philippines


This emerging markets analysis examines Philippine portfolio capital flows, recent performance and outlook of Philippine bonds / yields, equities, and the Peso from the perspective of an analyst/trader that utilizes fundamental, technical, quantitative, and intermarket analyses. Lastly, some final thoughts are provided, as well as a Philippine Financials and Capital Flow Dashboard.

Philippine Capital Flows

The prospect of US normalization of interest rates led to net outflow of foreign portfolio investments of about  $310 mn and $600 mn in 2014 and 2015, respectively. However, the dovish-reversal of the Fed (see Emerging Market Analysis for Apr 4) in Jan has sent risk capital in search of yield as the likelihood of a rate rise diminishes. As discussed in previous reports, this author believes no rate rise will occur this (election) year and that the next major US monetary action shall be a rate cut, ZIRP or NIRP, and, possibly, QE4.

While more permanent-term capital started returning early in 2016, portfolio capital flows lagged slightly. FDI recorded $587 mn net inflow to start the year, a 123% increase from last Jan and represents the largest intake since Sep’s $1.519 bn haul. FDI flows targeted: $257 mn equity, $257 mn debt, and $73 mn reinvested earnings (Chart 1). After taking in $5.724 bn in net FDI inflows in 2015 versus $5.74 bn in 2014, the  government hopes to reach $6 bn this year.

Foreign portfolio investments continued cautiously in Jan, turning positive in Feb, before shedding the reins with a $482 mn net inflow in Mar, the biggest accrual in 13 months (Chart 2). According to the BSP, United Kingdom, US, Singapore, Luxembourg, and Hong Kong accounted for 80% of inflows in 2015, of which 78% were invested in PSE-securities and 22% in PH government securities.

20160419 Chart 3

Although not counted in capital flows, personal remittances (which is recorded in the current account balance) represents a major source of capital for the Philippines. Personal remittances from overseas increased 4.4% to $28.48 bn in 2015, representing roughly 10% of GDP. Foreign investors pondering a course of action for the Philippines may take a cue from what OFWs are currently thinking: Through the first two months of the year, personal remittances are up over 6% YoY, with Feb remittances jumping 9.0% from the prior year.

Steady private investment, construction, and infrastructure projects are expected to keep the Philippine economy humming (2016 GDP growth estimates range from 6% to 7%), negating the debilitating effect of a weaker external environment, increased financial market volatility, and potential havoc a weakening greenback (and strengthening local currency) can have on exports. Despite the difficult environment emerging economies faced last year, the Philippines GDP grew 5.8% and ended Q4 with a 6.3% annualized spurt. The current account surplus came in at 4.4% of GDP, sixth best out of twenty-eight emerging economies. Throughout, inflation remains subdued at around 1.4%. Thus, buoyed by solid economic fundamentals, the Philippines should expect increasing capital net inflows over the next 12 months, but risks remain. Next, a peak at bonds.

Philippine Bonds and Yields

The Philippine government remains active in the sovereign bond market. In Feb, the Philippine treasury department visited the international capital markets completing a 25Y USD 2 bn par issue with a 3.70% coupon, maturing in 2041, which improves on last year’s call (25Y USD 2 bn par issue with a 3.95% coupon, maturing in 2040). Similar to 2015, a portion of the proceeds went to buyback and retire higher-paying coupon bonds.

According to Reuters, Philippine companies are expected to raise over P100 bn ($2.1 bn) via the bond markets in 2016 as increased volatility last year kept many away. Much of the proceeds would be used for public-private partnership (PPP) projects, including toll roads, schools, an automated fare collection system, a railroad, a hospital and a bulk water project, as well as to pay-off retiring obligations. Corporates with an international investor following may take a looksy at the international bond market. Several weeks ago, Ireland successfully issued a 100-year (“century bond”) 2.35% coupon sovereign debt, just years after paying off its bailout loans from the European Debt Crisis in 2011. The Irish paper was priced to yield 31 bps below 30Y US Treasury bonds! Great timing or Luck ‘O The Irish?

Philippine Peso 10Y bond yields fell at the beginning of the year (first arrow in DB Chart 2). But, anticipation of the government’s jumbo USD sovereign bond offering sent yields sky-rocketing as investors positioned themselves (second arrow in DB Chart 2). Already, yields are drifting lower and should stabilize. A glance at the Philippine USD yield curve reveals that Philippine USD paper provides around 150 bps and 100 bps pick-up over US treasuries at 10-15 year and >15year maturities, respectively (DB Chart 4).

Recent Performance of Philippine Equities

Strong net foreign portfolio investment outflows last year led to a 3.9% drop in the PSEi Composite Index in 2015. But, the abrupt shift in sentiment starting in mid-Jan resulted in a “V” shaped reversal as foreigners plowed back in and locals piggy-backed for the ride (Chart 4). Since mid-Mar, a flag pattern has emerged signifying a rolling-stop as early-profit takers depart and new investors clamber aboard – note confirming volume slow down (Chart 5).  As a continuing indicator, the flag suggests the PSEi would likely run to about 8600-8700 before the first significant correction. Looking ahead, forceful penetration of the upper resistance zone of the flag at around 7370-7380 denotes resumption of the bullish trend. The trigger could emanate from any direction: poor Q1 US earnings announcements, more dovish Fed talk (next FOMC Meeting, Apr 26-27), major FDI announcement, strong OFW remittance inflows, relatively smooth Philippine presidential election (May 9). Two major risks facing the Philippines are the perceived outcome of May’s elections and yet another flip-flop by the Fed. A down-break below 7180 on heavy volume nullifies the bullish trend set-up, requiring reassessment of the (then) current situation. Next, let’s see what currency markets are saying.

Outlook for the Peso

For all the money printing and expanding Fed balance sheet, USD reigns supreme in the currency waters and when it decides its time to change direction, like an EEE-Class container ship, best to stand clear as all currencies feel the impact. As laid out in the previous report (Emerging Markets Analysis for Apr 4), with interest-rate hikes on hold, the USD Index, which has been trading in a consolidation zone since early 2015, will test its lower support level at 93-94 (far right DB Chart 9). As USD weakens, the PBOC will likely re-peg the renminbi to the greenback to help Chinese exporters and, hopefully, stabilize the weakening Chinese economy. Of course, other exporting countries may further loosen monetary policies and lower interest rates to defend their exports. On Apr 14, Singapore’s MAS switched to a neutral stance (by pegging SGD to a currency basket) to keep the SGD from strengthening against the depreciating greenback. The currency wars continue.

Meanwhile, the Peso will likely go with the flow, moving in between large waves like an agile cutter, with the BSP tweaking monetary policy here and there. After reaching its weakest point in six years on Jan 26 at P48.15/USD, the Peso has strengthened to about P46/USD on the back of steady capital inflows.

Final Thoughts

The Fed is unlikely to raise interest rates this year. Chair Yellen and other FOMC members have all but shouted this. Already, capital searches for higher yielding opportunities, including emerging economies and financial markets. Philippine equity performance over the last three months sits at the midpoint for emerging equities, despite a compelling economic story (DB Chart 8). To be sure, the Philippines has righted its economic house during the last six years and appears as one of the most attractive participants in the on-going foreign investor beauty pageant. With presidential elections less than three weeks away, a smooth outcome and hand-over would pave the way (hopefully) for continued economic, monetary, and structural progress made by the out-going Aquino administration. And, with a little good fortune, the Pearl of the Orient may yet be crowned belle of the ball and receive an allocation upgrade from investors.

Philippine Financials and Cash Flow Dashboard

Interest Rates / Bonds



Emerging Countries’ Capital Flow Dashboard20160419 Table 1.jpg