Summary of Speech of Enrico M. Trinidad

The Philippine economy is at a crossroads. Before moving forward to 2017, let’s have a quick review of significant economic events in the year 2016. Within 2016 the following happened: 1) the Philippine Stock Exchange index (PSEi) falls to 6,084 then rises post-elections to retest high of about 8,100; 2) Prospects of more US rate hikes and negative coverage of extra-judicial killings bring PSEi down as much as 20% from the high; 3) After hitting 48 at the start of the year, Peso strengthens to 46; 4) Peso depreciates sharply, briefly flirting with the P50 to $1 level.

Since about 50% of the stock market daily value turnover is composed of foreign transaction a very significant event in 2016 was the decision of the Philippine Supreme Court to allow both common and voting preferred shares to be used as the basis for calculating foreign ownership. If only common shares were allowed to be the basis for calculating foreign ownership, many stocks would be beyond the 40% constitutional limit for foreign ownership which will prevent foreign funds from buying Philippine stocks that have reached the ceiling limits of foreign ownership. This could have been a disaster for the stock market.

As illustrated in the table above, Ayala Land Inc., PLDT Inc., Security Bank, International Container Terminal Services Inc. (ICTSI), and Globe Telecoms have been above the foreign ownership limit without the Supreme Court ruling.

The months of December and January are historically strong months for stocks. After reaching a low of 6,499, the PSEi rallies 5.2% in two trading days of the year 2016. The PSEi ends the year at 6,840 – down 1.6%. After the new year, the rally continued for another week with the PSEi reaching a high of 7,402. Six (6) straight up days to start the year 2017 or 8.2% year to date (YTD) at the peak. There was less foreign selling.

Global equity markets ended 2016 on a strong note as shown by the following charts: 1) New all-time high for the Dow Jones; 2) New all-time highs for the S & P 500; 3) New all-time highs for the Nasdaq; 4) New all-time highs for the FTSE 100; 5) Strong performance in Germany; 6) Strong performance in Japan; 7) Strong performance in Australia; and 8) Emerging markets show a recovery pattern.

After seeing all the recent development, where do we go from here? After rising as much as 13.8% (the PSE index) from the December 2016 low, the stock market is now taking a breather. We may have seen the low in this corrective phase.

In the Philippines there seems to be a disconnect between Fundamentals versus Sentiment. The government’s pro-growth policies were overshadowed by social issues. From August 2016 to the 1st week of December 2016 the Philippine Composite Index dropped by 20%. But from the December 2016 bottom the market turned and recovered to rise 13.8% by January 2017. Investor sentiment deteriorated sharply from August 2016 to December 2016 as reflected in foreign fund outflows for equities, fixed income and currency. Approximately Php 60 billion in foreign outflows in four (4) months. Local and foreign dailies emphasized EJKs in the Philippines.

“Market sentiment is susceptible to irrational shifts and noises in the short run. But consistent and sound macroeconomic fundamentals – coupled with clear and timely communication – will enable market players to eventually filter out noises and rationally align their expections and sentiments “ BSP Governor Amando Teteangco, Jr.

“The Philippine economy can sustain 7% economic growth this year and the next few years.” NEDA Director General and Economic Planning Secretary Ernesto Pernia

“Peso depreciation is definitely market sentiment - driven.” “This is hardly consistent with a growing economy. Your public finance is doing well, inflation is at 1.8%. External payments position continues to be broadly manageable. Reserves are sufficient.” BSP Deputy Governor Gunigundo

The fundamentals are solid because of the following: 1. Demographic sweet spot 2. Strong domestic consumption 70% of GDP 3. Robust OFW Remittances +5.2% year on year approximately US$26.6 billion for 2016 4. Strong BPO Sector 5. Potentially high infrastructure spending 5.0% of GDP 6. Rising foreign direct investment China yields US$3.7B for projects Japan to provide US$8.8B in loans & investments 7. Rising tourism revenue 8. Increased agricultural development 9. More reasonable valuations for stock prices

But the abovementioned fundamentals can be affected by sentiment and misguided policies such as the following: 1. Above forecast interest rate hikes here and abroad 2. Slower BPO growth as expansion is put on hold 3. Weakening peso 4. Resumption of foreign outflows 5. Lower current account surplus or a potential deficit 6. Ballooning fiscal deficit 7. Credit rating downgrade 8. Political uncertainty brought about by controversial rhetoric here and abroad

Shifting now to the situation in the United States and how it will affect our economy. The result of Trump’s statements to decrease regulation, cut taxes and boost infrastructure spending, as well as his pro-business appointees resulted in a 10% rise in the Dow Jones index which is at an all-time high. However, later in January the US rally stalled which can be attributed to the power of words. Significant uncertainty over whether Trump will tone down his rhetoric or if he will follow through with policies especially on trade, protectionism and immigration. Global equity markets, led by the US, were rattled by recent travel ban. Not to mention widespread opposition from big business leaders such as Elon Musk of Tesla, Tim Cook of Apple, Bill Ford Jr., of Ford, Seget Brin of Google who said “Im here because I’m a refugee.”

Where do we go in 2017? Ray Dalio, the fund manager of the largest Hedge Fund in the world said, we are in an investment environment with “exceptional uncertainty”. The direction of the US stock market will have a significant impact on emerging markets like the Philippines.

The following will be the catalysts for the Philippines: 1. Above forecast for corporate earnings growth 2. Above forecast GDP Growth 3. Higher than expected OFW remittances and BPO growth 4. Passage and swift implementation of the tax reform package 5. Swift and smooth implementation of infrastructure stimulus 6. Increase in economic contribution of tourism and agriculture sector

And the following will be the risks to watch: 1. Above forecast interest rate hikes here and abroad 2. Slower BPO growth as expansion is put on hold 3. Weakening Peso 4. Resumption in foreign outflows 5. Lower current account surplus or a potential deficit 6. Credit rating downgrade 7. Ballooning fiscal deficit 8. Political uncertainty brought about by controversial rhetoric here and abroad

The long term trajectory for Philippine growth is still upward. Over the long term, the country will continue to grow and companies will also grow. Despite the numerous crises that came our way, the Philippine stock market continued its march higher. Long term chart shows that the PSE index is up 330% since March 2009. At that time the PSEi was at 3,600. The Dow Jones index was 10,000 in August 2010. Since then both the Dow Jones and the PSE index have doubled.