FINEX Conference 2019, Part One

It was a full schedule of speakers during last week’s 2019 Financial Executives Institute of the Philippines (FINEX) Conference. Kudos to FINEX President Ebot Tan, EVP Grace Tiongco and Overall Chairperson FINEX Week Committee Mike Guarin for the well organized and efficiently managed conference which kept finance executives and professionals like yours truly glued to our seats listening to the various speakers expound on the opportunities of the next digital wave, the theme for this year, as well some investment experts’ view of the global economic climate.

Allow me to share with you some interesting nuggets to think about that I picked up during the conference.

From the economic briefing that preceded the conference proper a day before, we had Miguel Agarao, a VP from Philequity Management, Jonathan Ravelas First VP and Chief Market Strategist of BDO, and Asia Academe and Political Columnist Richard Heydarian sharing their views on the investment climate and where we are headed.

From a stock market that started like gangbusters at the start of the year with the Philippine Stock Market index (PSEi) hitting a high of about 12 percent return as of mid-July year-to-date, the market since then has dwindled to an intravenous drip-like return of about 4 percent year-to-date as of last week.

Because of the strong economic fundamentals of the Philippines, the view is that the PSEi should be trading closer to the 9,000 level instead of the current range of about 7,700 to 7,800.

Why is this happening then? The main culprit is Donald Trump’s trade war with China which has triggered a global economic slowdown in a scale that is bringing the world closer to a recession.

Ironically, the thinking is that it will be the Western economies, notably US and Europe, that will experience a much more pronounced slowdown and not China that is experiencing a “weaker” growth of “only” 6.2 percent as of the second quarter of 2019.

This of course is lower compared to their historical norm of about 8 percent growth and is China’s lowest growth rate in almost three decades. Compare this to the US’ GDP 2019 second quarter growth of only 2 percent and the 19-country euro zone of a measly 0.2 percent GDP growth. Guess who is in a better shape to withstand a global slowdown?

A conventional tool used to combat slowdown is to stimulate the economy by dropping interest rates. China’s interest rate was cut to 4.2 percent last week compared to the US federal funds rate of 1.75 percent and the euro zone interest rate which is currently at an unbelievable minus 0.5 percent. Guess who has more elbow room for further interest rate cuts?

Furthermore, China being a controlled economy can easily resort to a devaluation of the yuan to offset the US imposed tariffs stimulating further their exports and bloating, on the other hand, the trade deficits of the importing countries in the process and triggering possibly a currency war as well.

For perspective, the yuan is currently at about 7 CNY to 1 USD versus its historical low of 8 CNY the past decade compared to its high of 6 CNY. The ultimate “big stick” however that China can wield is to unleash their $1.2 trillion holdings of US Treasuries in the market thoroughly upsetting the global financial markets beyond imagination.

Again, for perspective, total US debt is $21.97 trillion of which $16.1 trillion is held by the public and intragovernmental holdings of $5.87 trillion. Of the $16.1 trillion, foreign governments, like China, hold 30 percent or $4.8 trillion. China has 25 percent of that $4.8 trillion pie that if sold back to the market will certainly cause massive devaluation of the holdings of other governments wiping balance sheets and destabilizing the financial condition of these countries. Guess who is likely to blink in this looming financial armageddon?

How about the Philippines? How are we doing and what is in store for us? Although our stock market is somewhat lackluster largely for reasons beyond our control, our economy is actually doing well. Inflation is at a low of 0.9 percent as of September mainly due to the drop of the price of rice, a key component of our inflation numbers. This has enabled government to cut the overnight reverse repurchase interest rate to 4 percent triggering the drop of Treasury Bill rates to as low as 2.9 percent for 91 days. Notwithstanding a relatively anemic GDP growth rate of 5.5 percent for the first semester, because of the projected acceleration of the “Build, Build, Build” infrastructure program during the second half, our economy is expected to still hit the low end of the government’s forecast of 6 percent growth for 2019. As the price of oil has receded back to a range of about $55 to $60, the peso remains fairly stable at about P52 to P53. Of course, all bets are off if a shooting war erupts in the Middle East disrupting our supply of oil.

Inevitably, there was also a commentary on the political and governance landscape of the Philippines. In sum, it was observed that an apparent trend of charismatic-populist leaders has emerged in several countries including of course our very own President Duterte. Notwithstanding the political noise from oppositionists, the majority of our people are apparently satisfied with how our country has been governed. The political analyst in the forum had an interesting description of the administration. “Imperial Presidency not dictatorship” is how he described it. In other words, the President is effectively above the law but not in a position to enforce “neo-patrimonial compliance” among the civilian elite populace and the military. Simply put, with continuing approval from the masses and political allies in Congress, this administration will by and large be able to accomplish what it wants to do until 2022.