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11:25am Wednesday 25 November 2009 Philippine Stock Exchange Index 3057.74

Over the weekend, I was fortunate to have been in a strategic planning presentation by a noted professor in entrepreneurship, Dr. Ed Morato who previously lectured at the Asian Institute of Management and now runs courses on entrepreneurship at the Ateneo Graduate School of Business. There were a few points that I took home from that 3-hour lecture. The first is that when one plans his strategy, he must be able to identify the underlying mega trends. Failing to do so would make success quite difficult. The second was that aggregate numbers such as GDP ought not to be our only decision-making guide. We should look at the possibilities within the economic aggregates for profit opportunities. He cited as an example a car battery manufacturer and a second tier fast food chain that are both doing extremely well because of current economic conditions. The car battery business is apparently doing well because car owners are holding on to their cars longer and, consequently, taking more preventive maintenance expenses. The fast-food business, on the other hand, has been capturing the segment of consumers that are spending down from casual dining to high-end prepared meals. I think the message that Dr. Morato has for investors is that markets are not homogenous and while there may be a global and macro view to business environment, business enterprises will fail or succeed depending on how they respond to the environment they operate in.

Another idea that I picked up was that the Philippines is predominantly a service economy. Most of our population are both inclined and gifted in the industries that are service oriented. These are the BPOs, tourism, banking, real estate, insurance and telecoms. In effect, if there is a mega trend in our economy it is that we are moving more and more toa service dominated economy. This situation will likely continue the OFW phenomenon – people wanting to earn more for the services they render. While there will continue to be agriculture, mining and manufacturing in the country, these will not be as dominant as the service industries.

I believe that these ideas provide strategic information for the local stock market. It probably means that telecom, power and utilities will be dominant drivers in the market. It is understandable why MVP and San Miguel are battling tooth and nail for Meralco. It is also gives light to why telcos such as TEL and GLO (and possibly DGTL in some distant future) will provide core portfolio alternatives to most institutional asset managers. It similarly explains why property developers ALI, MEG, FLI and VLL will always attract investors in cycles. In essence, our market will have as its major driver the idea that the service sector will provide the long-term growth of the Philippine economy.

Coming back to the recent market activity, it appears to me that the underlying mood in the equities market continue to be driven by the global interest rate outlook. Of course, the U.S. has been gradually rebuilding foundations for future growth and surely the Euro Zone has been striving to bring back its industries. The U.S. just revised its 3Q GDP growth from 3.5% down to 2.8%. Many economists may disagree with me, but I took notice of the improvement in U.S. exports as a very positive indicator for the economy. Some economists brush this off because they say that the U.S. economy is so dominated by consumption that exports are not that critical. I find the improvement in U.S. exports deepens the substance of this recovery because together with NAFTA, that hemisphere in regaining some manufacturing space which had progressively declined over the last 35 years. While the absolute number may not be significant to economists, I find that it is the change in trend which is important.

Nevertheless, what prevented the U.S. market from tanking horribly from the downward revision was data that home prices have increased for 5 months in a row. To my mind, what is now happening in the U.S. is that people are spending less on discretionary consumer items and using the money for investment type spending such as low leveraged home ownership. They are going back to basics and that can only be good in the long run.

In a certain way, the Philippine economy is similar to that of the U.S. – consumer spending has been the biggest driver for GDP. I think, however, that Filipinos will be shifting more of that spending to durables such as homes and appliances. This kind of trend strenghtens the inherent nature of the service economy that we are moving deeper into. There remains to be a large amount of savings that needs to be spent or invested. Low interest rates will discourage people from keeping money in the bank, but the idea of building personal savings pools has been ingrained among many Filipinos already. These savings will underpin the Philippine market for some time to come.

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