The Punisher and the financial Thrilla in Manila

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The Punisher and the financial Thrilla in Manila
Filipinos during the Philippine elections in presumptive president-elect Rodrigo Duterte's hometown of Davao city. The elections' results have apparently showed that the public has turned against the country's political elite.

Dubai - A government under Rodrigo Duterte rule seems interesting

By Matein Khalid

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Published: Sun 15 May 2016, 5:51 PM

Last updated: Sun 15 May 2016, 7:58 PM

While Pakistan has emerged as Asia's top-performing market in 2016, I am amazed at the Cinderella valuations in regional equities. Asia ex-Japan now trades at 1.2 times price-to-book value, a metric the world last saw in the bear market lows after 9/11 and the US invasion of Afghanistan in October 2001, the Hong Kong Sars crisis and Iraq war in March 2003 and the credit market seizure after Lehman Brothers's failure in September 2008.
Why? Ours is not to reason why, ours is but to do and die, to mutilate a Victorian poet's take on another valley of death in the Crimean War. The China shock has gutted world trade and Hong Kong/Singapore property bulls finally meet their nemesis in Ursa Maximus. Returns on equity have also been squeezed in China, South Korean and Taiwan. My best short? Iron ore stocks (Vale, Fortesque, BHP) and the Singapore dollar, which I expect to depreciate to 1.40. Hence the Bharat Mata carry trade last week (long Indian rupee/short Sing dollar)!
The Philippines fascinated me ever since I befriended the children of the Lopez, Vilar and Marcos clans as a student at the Wharton School in Philadelphia. Derided by economists as "Southeast Asia's sick man", the Philippines' economic miracle in the Benigno Aquino era was an emerging market fairy tale. Six years of six per cent GDP growth, tax reform, a stellar 200 per cent return on Manila equities, $30 billion in annual remittances, a wild property bull run in the Manila and Baguio City condominium market, multiple sovereign credit upgrade, a BPO revolution and a stabilised peso. Yet even though my best Filipino friend at Wharton was a Lopez grandson of Magsaysay's vice-president and president Marcos' daughter Irene was a classmate, I could never understand the surreal circus of Filipino politics.
This nation's economy and politics is dominated by 40 or so dynastic families, de facto oligarchies who emerged to prominence in the Spanish and American colonial era. The Philippines (like Pakistan) had a pathetic tax/GDP ratio and dismal human capital metrics. One-tenth of the labour force, the fabled overseas Filipino workers, or OFWs, lives abroad. Extreme income inequality would make Thomas Malthus, let alone Thomas Piketty, wince beneath the effervesce of the Makati Village social whirl, the Philippines is a nation with deep socio-economic injustice embedded in its status quo. President Aquino, scion of one of Tarlac's great land-owning clan, did nothing to end the dynastic chokehold on the economy even as his reforms were a financial windfall for the business elite and foreign investors. My strategy ideas on Manila equities since 2010 were all Radio Gaga.
Rodrigo Duterte (the Punisher of Davao City!) will now move into Malacañang Palace for the next six years. The electorate has spoken and rejected Mar Roxas, Grace Poe and yes, even Bongbong Marcos. The public has turned against the elite that hoarded wealth in this land for four centuries in a Spanish convent, five years in a (Tojo) Japanese prison and 70 years of Hollywood, albeit with martial law, dictatorships, abortive military coups (Colonel Gringo Honasan!), volcanic eruptions, the Moro secessionist war in Mindanao and the NPA and Abu Sayyaf terrorism.
Manila's PSE index depreciated seven per cent in April as Duterte's lead widened in the polls but has risen six per cent of Duterte Harry's election. Manila is expensive at 17 times earnings for only eight per cent earnings growth but I cannot forget that the stock market surged 25 per cent in the six months after both presidents Arroyo and Aquino took office. The economic potential of the Philippines, unlocked by Aquino, is vast. A nation of 100 million people with Southeast Asia's youngest population, higher call centre revenues than India, a potential tourist, mining, agribusiness (Dole) colossus. Consumption is 70 per cent of the Filipino GDP; this is not an Asian tiger but an Asian cheetah!
I think there is big money to be made in the Philippine's property market, especially if Duterte changes the constitution to allow foreigners land ownership. Shopping malls (SM Prime), developers (Megaworld, Ayala Land), fast food chains (Jollibee, the kabayan KFC!) and banks (Banco de Oro, Bank of the Philippine Islands) are all compelling but only at specific prices much lower prices.
Naturally, I will continue to track the Manila market and get insights in the Tagalog media from my colleagues Janine and Jennifer at Asas Capital DIFC. This is a real live, high-stakes financial Thrilla in Manila as Duterte "fattens the fishes" with the corpses of 100,000 executed criminals and confronts the Chinese Navy on a jet ski in Scarborough Shoal!
Matein Khalid is a global equities strategist and fund manager. He can be contacted at matein@emirates.net.ae.
 



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