7:00am Monday 14 September 2009 Philippine Stock Exchange Index 2870.83
August data signaled a recovery was well on track in China, the world’s third-largest economy. Chinese industrial output (+12.3%), investment and credit all grew more quickly than expected in August. Retail sales surged 15.4 % and consumer prices fell 1.2% (all year-on-year), alleviating worries that massive stimulus spending might fuel a resurgence of inflation. These are all good news for the region. With the markets in the U.S. and Europe holding, there seems to be reason for the investment mood to remain optimistic, even as the hungry ghost continues to run around. Perhaps, the ghosts are not that hungry after all or maybe their relatives have appeased them already with all those hell money being burned and food and incense being offered.
In my last topic, I made mention of a possible cut in reserve requirement of banks. I personally think that the BSP should have done that years ago. Reserve requirements for deposits in this country is 19% of the deposit amount making it very expensive for banks to translate this into low lending rates. In the end it is the borrowers that are penalized, not the banks.
Anyway, what is important about a possible reserve cut is the additional liquidity it will bring to the system by means of new loanable funds levels by banks. We will see more of those guys passing out quick loan application forms in the malls and busy streets of the business districts of Makati and Ortigas.
A reserve cut would have very strong structural benefits for bank profitability in this country. I think savvy investors would take positions in bank stocks in anticipation of the move. Objectively, BPI and BDO are both trading around twice their book value, so even if we see good profitability here, it is likely to be in the price already. UBP and PNB are the under appreciated bank stocks. While I understand why investors may be slightly jaundiced in their view of PNB given its history, UBP has always been a well run bank. Both are trading well below their book values and it is just a matter of time before the prices catch up. RCBC and SECB may also be cheap but, I think they lose out in transparency to PNB and UBP. PSB may also be a good buy, unfortunately, the stock is a bit on the illiquid side. Any buyer of PSB will need some patience. That really leaves MBT as probably the best trading bank stock in the market right now. It is just a shade above its book value, it has the critical mass to benefit from the reserve cut and the stock is very liquid.
Nonetheless, the broad message is that our stock market will continue to benefit from potential liquidity surges. Local investors will continue to dominate as money continues to pour into trust accounts of wealthy Filipinos.
This week, we are celebrating the anniversary of the Lehman Brothers collapse. A lot of wealthy Filipinos got burned in their private banking accounts in its wake. A lot of these funds would like to stay closer to home because people realize that you could lose more money in unfamiliar investments than you would if you stayed closer to home. Financially, the Philippines is in much better shape compared to a decade ago. In the past, we would be in crisis whenever the country’s foreign exchange resources were threatened. Last week, the BSP reported gross international reserves (GIR) of US$ 41 billion in spite of exports being down 25% for the year. To put this in perspective, when the Asian financial crisis of 1997-98 hit us, our GIR was just around US$8.5 billion and annual exports amounted to about US$ 10 billion or less than a billion dollars a month. In 2009, our exports are down significantly, yet it is close to US$3 billion a month. What does that tell you?
My point is this: we have moved into a different level in our market depth and activity over the last 4 years. We have a market that now has a life of its own. This time around, it will be he strong domestic factors that will drive stock prices – not foreign buying or selling. The forthcoming liquidity surge will have ony one result – higher asset prices.