The bullish case for Philippines property

BPO revenue growth posts 30% growth, writes Matein Khalid

I sat on a economic strategy panel last year with Dr Ishrat Hussein, former governor of the State Bank of Pakistan and eminent ex-World Bank economist. I suggested that the Philippine's incredible successes in tax collection, fiscal consolidation and sovereign debt management could be a model for Islamabad. To my surprise, Dr Ishrat agreed with me.
The Philippines was once derided as the "sick man of Asia" in the 1990's after the fall of the Marcos dictatorship, serial abortive military revols, Abu Sayyaf terrorism in Mindanao, political scandals, banking failures, chronic inflation and periodic debt crises. No more. For me, Manila is the must own market in Southeast Asa after the recent carnage in the Pacific Rim. Why?
One, the Philippines has 10 million citizens living and working overseas. Remittances are a $2 billion a month windfall with a seasonal uptick in December, as befits the only Catholic nation in Southeast Asia. The Gulf is home to 2.5 million Filipino workers and UAE remittances alone are eight per cent of total remittances, which are nine per cent of the Philippines GDP. Despite the oil crash, remittances rose 15 per cent from the GCC while they fell 23 per cent from the Filipino diaspora in the US/Canada (a call on the peso).
Two, Presidents Arroyo and Aquino have been the architects of the Philippines economic miracle and sovereign credit upgrade cycle in the past decade. A generation after "people power" (literally) stormed the gates of Marcos's Malacañang Palace, the Philippines is an authentic Asian tiger. Debt/GDP ratio has fallen from 91 per cent in 1991 to below 49 per cent last year. GDP growth is the highest in Southeast Asia at a stellar 6.4 per cent (fourth quarter GDP).
Three, Goldman Sachs flagged the Philippines peso as the safe haven currency in Asia (no more Singapore dollar, la!) due to the low foreign debt, a five per cent rise in remittances as volatility in the US dollar/peso rate falls and the credible, inflation focused monetary policies of Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco, Jr, whose term continues till 2017.
Four, Manila has eclipsed Bangalore as the hottest business process outsourcing (BPO) capital in Asia. BPO revenue growth has been literally viral in the past decade at a compound annual growth rate of 30 per cent. I understand the implications of $25 billion in remittances and $20 billion in BPO revenue on the Philippines sovereign credit and the peso all too well. Note that Manila's call centre and tech parks mainly serve US companies and insulate the economy from the big chill in Chinese trade.
Five, I concede the Philippines will elect a new President in May. Yet political cycles in the past have been bullish for Philippines shares, as I learnt to my surprise after the elections of Gloria Arroyo, Fidel Ramos and Benigno Aquino, when shares rose 25 per cent. If Mayor Rodrigo Duterte wins in May, he will capture the imagination of the world as a kabayan Modi. In a EM world where index mega beasts China, Turkey, Brazil, Russia and South Africa are toast, every fund manager in the world will scramble to the office towers of Makati, Metro Manila in a quest for alpha. So will I with Lord Sabri in tow!
Six, the Philippines is not cheap at 15 times earnings. Yet Manila traded at 20 times earnings before its brutal sell off since April 2015. The eight per cent lower peso is also icing on the cake. While earnings growth estimates have fallen from 15 per cent to 12 per cent in the past year, this was mainly due to the loonie tune valuation metrics of Manila gaming shares targeted to China high rollers, victims of President Xi's anti-corruption campaign and the bloodbath in Shanghai/Shenzhen. In any case, the 5 year valuation range is 17 times earnings.
Seven, the Philippines has the most amazing demographics in Asia (ex India) with the world's highest proportion of teenagers to total citizens. This is a consumer/property market services superpower in the making.
Eight, despite President's Aquino's stalled projects, construction spending will add $2.5 billion to the Philippines economy. Citigroup estimates GDP growth could get a 1.7 per cent boost.
The Philippines property market is the most attractive in Asia to me. My Boston Irish brother actually doubled his money in Bagio condos in the past year, when so many investors in the Gulf lost money. There is only one Asian condo king who matters for me, Dr Andrew Tan of Megaworld, now at a 50 per cent dollar discount and inexpensive at 10 times earnings. The other property blue chip is the "hidalgo" Zobel de Ayala clan's Ayala Land. These two stocks will define my own property "Thrilla in Manila" in 2016!
Researched and compiled by Matein Khalid. Mr Khalid is a global equities strategist and fund manager. He can be contacted at: matein@emirates.net.ae