Much ado about nothing
Stockbroker and long-time friend Joey Roxas of Eagle Equities Inc. reminded me of this romantic comedy by William Shakespeare in relation to what happened to our market last week.
The market was on an upward direction in the first two days of the week, then tilted backwards on Wednesday due to a sell-off in reaction to the appointment of well-known anti-mining crusader Gina Lopez as head of the Department of Environment and Natural Resources (DENR) under the administration of President-elect Rodrigo Duterte. Lopez is the managing director of ABS-CBN’s Lingkod Kapamilya Foundation Inc., a nongovernment organization with a hardline stance against the exploration and exploitation of the country’s natural resources.
The unexpected appointment of Lopez rattled the market’s sub-sector. The Philippine Stock Exchange’s (PSE) mining and oil index fell 7.3 percent, said to be the sector’s steepest drop in 10 months.
Semirara Mining and Power Corp. (SCC) and Philex Mining Corp. (PX) sustained the heaviest losses. Their mining permits were up for review, thus Lopez’s appointment drew serious concerns.
The market fell again on Thursday and Friday, this time due to the United Kingdom’s exit from the European Union (EU). Even close to the voting hour, Brit voters remained somewhat equally divided, driving markets to fall due to fears the “Brexit” could greatly affect the UK and the entire global economic growth.
The UK is 12 percent of the EU’s population and 20 percent of its gross domestic product (GDP). Its departure was perceived “crippling.” The possible departure of major members such as France or the Netherlands would thus be a “death blow” to global economics.
Related issues
UK’s status as one of the world’s biggest financial centers was expected to be diminished in a “Brexit.” It would lose its role as a gateway to the EU.
“Brexit” campaigners claimed, however, that Britain could “reinvent itself as a Singapore-style supercharged economy.”
For the “Bremain” supporters, exiting the EU was an unnecessary move that would just make the UK economy suffer. They said car makers in the UK would no longer be tax-free when exporting to other parts of Europe. UK employees in the EU would also likely lose what was described as “significant benefits” conferred while an EU member.
UK’s tax revenue was also expected to take a hit if companies doing large amounts of business with Europe would move their headquarters back to the EU.
Before voting to “Brexit,” the UK has been benefiting from trade deals made between the EU and other world powers. The exit would also mean the UK missing out on all the anticipated benefits of what the EU has been negotiating with the US (the world’s biggest free trade area). The trade deals done have been “highly beneficial to British business.”
“Brexit” proponents, on the other hand, claim the UK would be free to establish its own trade agreements. They said it could follow the lead of Norway. It has access to the single market but is not bound by EU laws on areas such as agriculture, justice and home affairs.
Pro-EU proponents doubt this could be easily obtained. They said the UK would remain bound by virtually all EU regulations, following agreements made in the Brussels summit in February.
The UK could adopt a “Canada-style trade arrangement” after its exit. The Canadians were able to strike a trade deal “getting rid of tariffs.”
The Pro-EU membership said, however, it would take “years of painful negotiations” to make this happen. They said the “Brexit” may even lead to getting a comparatively “poorer deal enjoyed today” with the EU.
Barclays, for its part, said “a departure of one of the EU’s most powerful economies would encourage the populist anti-EU movements in other countries.” It could lead to the “collapse of the European project,” it added.
Open Europe, a think tank that only wanted to see the EU radically reformed, said the worst case “Brexit” scenario was the UK economy losing 2.2 percent of its total GDP by 2030. In comparison, the recession of 2008 to 2009 shaved UK’s GDP by 6 percent.
On the other hand, the think tank also found out the GDP could rise by 1.6 per cent if the UK is able to negotiate a free trade deal with Europe based on its current trade set-up with the EU.
Bottom line spin
Amid the talk about the negative impact of a “Brexit,” it should not create that much fuss like in the plotted romantic relationships of the leading characters in Shakespeare’s work.
The “Brexit” has less impact on the US economy, in general. The impact would certainly be lesser for us.
In the case of the US, the small number of companies operating in the UK would be directly affected. In our case, it would be the small number of labor force based in the UK as well as the prospects of growing our labor export to the UK.
Remittances from overseas Filipino workers (OFWs) in the UK is not that substantial. The loss in employment prospects in the UK can easily be offset by the increasing demand for our OFWs within the region.
The Philippines also has strong local economic fundamentals that point to more economic growth. This is reflected in the latest United Nations Conference on Trade and Development (Unctad) 2016 World Investment Report. The Philippines managed to land within the top 15 prospective destinations for foreign direct investments (FDI).
Five percent of the respondents to the Unctad’s business survey of investments prospects of multinational enterprises (MNEs) chose the Philippines as among their top three most promising host countries from 2016 to 2018.
The Duterte administration, in its current posture to foster political stability, peace and order and a conducive investment climate, could ignite another long market rally. Should it succeed within the first 100 days, the Philippines may even snag larger foreign direct inflows than the previous. It could even possibly attract FDIs closer to the amount our Southeast Asian neighbors have been getting.
Should this happen, expect the market to perform better, one that could even ignite a long bull run. Start training your sights to sectors that will greatly benefit from this development.
We will try to look into them starting next week.
(You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)
