Reasons to remain optimistic
I admit, it’s hard to be optimistic right now given rising prices of goods, rising interest rates, the weak peso and the lackluster performance of the stock market accompanied by very thin volumes.
However, after reviewing some data on the economy and listed companies, and meeting with some economists and business leaders the past few weeks, there are reasons to be optimistic, objectively speaking. Because of this, investors shouldn’t lose hope despite the ongoing volatility in the stock market.
The Philippines will be one of the fastest growing economies this year. Based on consensus estimates, the Philippines’ gross domestic product (GDP) growth is projected to reach 6.5 percent this year and 6 percent next year. Although there is a strong possibility that consensus’ growth forecasts would not be met given the numerous threats facing the economy, the Philippines is still better off compared to other countries that are also facing a downside risk in their economic growth projections.
Consensus GDP growth forecast for the global economy is only 3.5 percent in 2022 and 3.4 percent for 2023.
One of the main reasons why the Philippines is more resilient than other countries is because it is a domestically driven economy. Note that domestic consumption accounts for more than 70 percent of GDP.
Consequently, although the global trade growth will slow down this year, with the World Trade Organization recently reducing its global trade growth forecast to 3 percent from 4.7 percent this year because of the impact of the Russia-Ukraine war, the Philippines will be less affected.
The long-term outlook for domestic consumption is also very optimistic because of the country’s favorable demographics. While other countries are already suffering from a shrinking population, the Philippine population is still growing by 1.3 percent annually. The median age of Filipinos is also very young at 25.7 years old. Finally, we are still in the middle of the demographic window, which is a period of rapid economic growth driven by the growing share of working age population to the total population. The demographic window is expected to last until 2055, which is still more than 30 years away.
Pro-FDI laws to bear fruit
Although there are many reasons why the Philippines is less attractive compared to other countries as an investment destination, companies that want to ride on the attractive growth prospects of the Philippines’ domestic economy would still want to invest in the country. The recent passage of several pro-foreign direct investment (FDI) legislation such as the Corporate Recovery and Tax Incentives for Enterprises Act, and the amendments to the trade liberalization law, the Foreign Investments Act, and the Public Service Act, should pave the way for these companies to invest in the country given less restrictions for foreign investors.
For example, just last week, PLDT announced that it signed an agreement for the sale of 5,907 telco towers for P77 billion to subsidiaries of two foreign groups—edotco Group and EdgePoint. With the amendments to the Public Service Act, which now allows foreign investors to own up to 100 percent of public services such as telcos, I won’t be surprised if this transaction will only be the first of many more investments in the telco space.
Banks report strong first quarter earnings results. Last week, BPI and BDO reported very strong first quarter earnings that improved by 60 percent and 13 percent, respectively. More importantly, both banks reported a recovery in lending activity with loans up by around 7 percent. BPI and BDO also reported a drop in their nonperforming loans ratio, justifying a reduction in their provisions.
Banks’ favorable first quarter earnings results imply that the reopening of the economy has a more significant impact on growth compared to rising commodity prices. As such, most companies are still doing better this year compared to last year, which is why they are borrowing more.
Companies (and insiders) are buying back their stocks. Even with the latest threats facing the economy, companies and their officers and major shareholders continued to buy back their stocks the past few weeks as they were being sold off in the stock market. This in my opinion is a strong sign of confidence that the threats facing their companies are only temporary, and that the valuation of their stocks remains very attractive even with the higher interest rates. INQ
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