The Late Bloomer
FALLS CHURCH, Va.–It’s taken the Philippines 10 years to get its economy on the right track. Now, though, its public finances are improving rapidly, foreign direct investment is rising, the Philippine peso is strong, and the Philippine diaspora dutifully contributes almost 10 percent of the country’s GDP.
The latter point is critical: In a sense, people are the Philippines’ biggest export, at least in terms of the reliability of their contribution. Overseas Filipino workers send home USD1 billion to USD1.2 billion per month. That money is usually channeled into real estate, although a portion is used to augment families’ domestically earned income.
Source: Bloomberg
The government, under the leadership of the President Gloria Arroyo, has been very responsive to the economy’s needs, implementing policies that can sustain growth for the long term. Although its pace hasn’t kept up with initial promises, the government’s privatization effort remains the best bet for the administration to further its goals.
Selling government-owned power assets is the centerpiece of the privatization program, and there’s a lot of optimism that the process will pick up speed in the next three to four months as the government continues to improve its finances.
The government is also committed to boosting infrastructure spending to 4.5 percent of GDP. Up to now political indecision and bureaucratic incompetence have restrained the economy’s real potential, so delivering on this front is critical. But the Philippines Dept of Finance and the Central Bank of the Philippines have been able to improve public finances dramatically, signs of effective leadership.
Since 2003, the Philippines has been running a primary balance surplus, which is now in excess of 4 percent of GDP. The combination of that surplus and falling interest rates has resulted in a fiscal deficit of just 1 percent of GDP in 2006. This will come down even further.
The failure of the global economic cycle is the primary external threat to the country’s growth; political uncertainty is the main domestic threat. President Arroyo must overcome a number of political hurdles in coming months, including allegations of impropriety that have recently surfaced.
The Philippine economy is enjoying rising investment in its growth areas, specifically property and construction, outsourcing, mining and tourism. The central bank cut rates again early this month, indicating its desire to spur credit growth. And inflation is low.
Assuming the government delivers on its privatization promises and improves its tax collection methods, the Philippines is on its way to establishing a sustained economic growth cycle.
Source: Bloomberg
Philippine Long Distance Telephone (NYSE: PHI, PLDT) is the country’s primary domestic telecommunications company.
PLDT is a relatively defensive consumer play. The company is benefiting from strong growth in domestic demand, a result of efforts to make its services more accessible through wider retail distribution coupled with rising domestic incomes and consumption.
PLDT pays a 5 percent dividend yield–the company’s strong free cash flow generation makes that a sustainable payout. The successful effort to expand its customer base indicates PLDT can increase the dividend as well.
A benchmark stock representing 27 percent of the local benchmark index, I’m adding the company to the Portfolio. Buy Philippine Long Distance Telephone.
Ayala Corp (OTC: AYYLF) is the biggest conglomerate in the Philippines, though its primary focus is real estate. It’s also involved in financial services, manufactures and sells cars, and has operations in the food and agriculture industries.
Ayala’s real estate business is the most interesting; it offers exposure to the country’s premier growth sector in the residential and office segments. Residential real estate should continue to strengthen because the Philippines’s mortgage-to-GDP ratio of 2 percent can do nothing but go up as interest rates continue to decline. The office segment will also remain strong–supply lags demand and is trying to catch up.
Ayala Corp subsidiary Ayala Land is the premier name in the sector. It holds a diversified portfolio of projects, a respected brand and a highly regarded management team.
The Ayala Corp story is compelling, but the shares are thinly traded on the US over-the-counter market; I’m therefore adding it to the Alternative Holdings Portfolio. Buy Ayala Corp.
Fresh Money Buys
Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets (consult the Portfolio for details), in order (for both countries and sectors):
How Silk Works
The Silk Portfolio has been constructed around the view that domestic economic demand and investment are driving Asia’s economic ascent.
The Portfolio should be viewed as a whole rather than an assortment of stocks. It’s my hard-earned assumption that investors seldom follow such advice, so I also offer some direction in an effort to assist with the decision-making process in the Fresh Money Buys section.
In this section, readers can find a guide as to how I rank countries and sectors at any point in time. The ranking changes often, so pay attention.
The ranking starts with the countries I prefer and then lists specific sectors you should look into. When I mention a sector, it’s assumed that the first pick will be from the Long-Term Holdings and then, if more exposure is warranted, from the Alternative Holdings part of the Portfolio. Of course if a country isn’t represented in the Long-Term Holdings, refer to the Alternative Holdings for a selection (as is the case for Macau).
Portfolio recommendations should be taken at face value, in the sense that if a stock is recommended as a buy and trades below the price indicated in the Portfolio tables, the recommendation stands for newcomers as well as longer-term readers.
Occasionally, I recommend that long-term readers take profits off the table by booking any gains while letting the initial capital invested.
In other words, I expect investors to look at their profits (i.e., how much money they’ve made above the initial investment) and then calculate how many shares they needed to sell in order to take those profits off the table.
If you’re not a “long-term reader,” chances are you probably don’t have profits to take from the specific stock; you’re unaffected by the recommendation. The fact that I haven’t advised selling the stock outright indicates that it remains a good, long-term holding.
Silk has one main portfolio, the Long-Term Holdings, and an alternative, the Alternative Holdings-Permanent Hedges. Look first to the Long-Term Holdings for asset allocation in the markets covered here.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended for longer-term or more fundamental reasons, and they represent additional exposure to favored investment themes. For example, Lukoil (OTC: LUKOY) provides extra exposure to a favored theme–Russia and energy.
On the left-hand side of the Web site’s main page, under Portfolio Performance, you can get a snapshot of the Portfolio’s return compared to other major indexes.
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. I plan to enhance the Portfolio table with extra features and welcome comments and suggestions.
Many new readers have also asked, “What do we do when the market drops substantially?”
Since Silk’s inception, I’ve been skillful and lucky enough to have booked profits before precipitous falls, in which case I recommended sitting still through the turmoil. I will also get word to you via a Flash Alert if events turn too quickly.
Silk is built around a set of core themes. I often revisit those themes or certain analyses through a link to a previous article or by reproducing relevant paragraphs. You can also read previous issues in the Archives to gain an understanding of the investment philosophy of the publication.
Or you can ignore my advice and try to find the next big hitter the Portfolio will produce. You may succeed, but be aware that I don’t play that game; “fast guns” are wasting their time with this publication, as well as Asia and the rest of the international markets as an asset class.
The latter point is critical: In a sense, people are the Philippines’ biggest export, at least in terms of the reliability of their contribution. Overseas Filipino workers send home USD1 billion to USD1.2 billion per month. That money is usually channeled into real estate, although a portion is used to augment families’ domestically earned income.
Source: Bloomberg
The government, under the leadership of the President Gloria Arroyo, has been very responsive to the economy’s needs, implementing policies that can sustain growth for the long term. Although its pace hasn’t kept up with initial promises, the government’s privatization effort remains the best bet for the administration to further its goals.
Selling government-owned power assets is the centerpiece of the privatization program, and there’s a lot of optimism that the process will pick up speed in the next three to four months as the government continues to improve its finances.
The government is also committed to boosting infrastructure spending to 4.5 percent of GDP. Up to now political indecision and bureaucratic incompetence have restrained the economy’s real potential, so delivering on this front is critical. But the Philippines Dept of Finance and the Central Bank of the Philippines have been able to improve public finances dramatically, signs of effective leadership.
Since 2003, the Philippines has been running a primary balance surplus, which is now in excess of 4 percent of GDP. The combination of that surplus and falling interest rates has resulted in a fiscal deficit of just 1 percent of GDP in 2006. This will come down even further.
The failure of the global economic cycle is the primary external threat to the country’s growth; political uncertainty is the main domestic threat. President Arroyo must overcome a number of political hurdles in coming months, including allegations of impropriety that have recently surfaced.
The Philippine economy is enjoying rising investment in its growth areas, specifically property and construction, outsourcing, mining and tourism. The central bank cut rates again early this month, indicating its desire to spur credit growth. And inflation is low.
Assuming the government delivers on its privatization promises and improves its tax collection methods, the Philippines is on its way to establishing a sustained economic growth cycle.
Source: Bloomberg
Philippine Long Distance Telephone (NYSE: PHI, PLDT) is the country’s primary domestic telecommunications company.
PLDT is a relatively defensive consumer play. The company is benefiting from strong growth in domestic demand, a result of efforts to make its services more accessible through wider retail distribution coupled with rising domestic incomes and consumption.
PLDT pays a 5 percent dividend yield–the company’s strong free cash flow generation makes that a sustainable payout. The successful effort to expand its customer base indicates PLDT can increase the dividend as well.
A benchmark stock representing 27 percent of the local benchmark index, I’m adding the company to the Portfolio. Buy Philippine Long Distance Telephone.
Ayala Corp (OTC: AYYLF) is the biggest conglomerate in the Philippines, though its primary focus is real estate. It’s also involved in financial services, manufactures and sells cars, and has operations in the food and agriculture industries.
Ayala’s real estate business is the most interesting; it offers exposure to the country’s premier growth sector in the residential and office segments. Residential real estate should continue to strengthen because the Philippines’s mortgage-to-GDP ratio of 2 percent can do nothing but go up as interest rates continue to decline. The office segment will also remain strong–supply lags demand and is trying to catch up.
Ayala Corp subsidiary Ayala Land is the premier name in the sector. It holds a diversified portfolio of projects, a respected brand and a highly regarded management team.
The Ayala Corp story is compelling, but the shares are thinly traded on the US over-the-counter market; I’m therefore adding it to the Alternative Holdings Portfolio. Buy Ayala Corp.
Fresh Money Buys
Because the investment process is constant, if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets (consult the Portfolio for details), in order (for both countries and sectors):
- Singapore (banking, telecommunications, industrial)
- South Korea (electric power, banking)
- Hong Kong (banking, real estate, infrastructure, publishing)
- India (pharmaceuticals)
- China (consumer, coal, power, oil, water)
- Russia (telecommunications, energy)
- Malaysia (ETF)
- The Philippines (Telecommunications, Real Estate)
- Taiwan (technology, telecommunications)
- Europe (pharmaceuticals, industrials, communications equipment, oil)
- Japan (banking, industrials)
- Macau
How Silk Works
The Silk Portfolio has been constructed around the view that domestic economic demand and investment are driving Asia’s economic ascent.
The Portfolio should be viewed as a whole rather than an assortment of stocks. It’s my hard-earned assumption that investors seldom follow such advice, so I also offer some direction in an effort to assist with the decision-making process in the Fresh Money Buys section.
In this section, readers can find a guide as to how I rank countries and sectors at any point in time. The ranking changes often, so pay attention.
The ranking starts with the countries I prefer and then lists specific sectors you should look into. When I mention a sector, it’s assumed that the first pick will be from the Long-Term Holdings and then, if more exposure is warranted, from the Alternative Holdings part of the Portfolio. Of course if a country isn’t represented in the Long-Term Holdings, refer to the Alternative Holdings for a selection (as is the case for Macau).
Portfolio recommendations should be taken at face value, in the sense that if a stock is recommended as a buy and trades below the price indicated in the Portfolio tables, the recommendation stands for newcomers as well as longer-term readers.
Occasionally, I recommend that long-term readers take profits off the table by booking any gains while letting the initial capital invested.
In other words, I expect investors to look at their profits (i.e., how much money they’ve made above the initial investment) and then calculate how many shares they needed to sell in order to take those profits off the table.
If you’re not a “long-term reader,” chances are you probably don’t have profits to take from the specific stock; you’re unaffected by the recommendation. The fact that I haven’t advised selling the stock outright indicates that it remains a good, long-term holding.
Silk has one main portfolio, the Long-Term Holdings, and an alternative, the Alternative Holdings-Permanent Hedges. Look first to the Long-Term Holdings for asset allocation in the markets covered here.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended for longer-term or more fundamental reasons, and they represent additional exposure to favored investment themes. For example, Lukoil (OTC: LUKOY) provides extra exposure to a favored theme–Russia and energy.
On the left-hand side of the Web site’s main page, under Portfolio Performance, you can get a snapshot of the Portfolio’s return compared to other major indexes.
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. I plan to enhance the Portfolio table with extra features and welcome comments and suggestions.
Many new readers have also asked, “What do we do when the market drops substantially?”
Since Silk’s inception, I’ve been skillful and lucky enough to have booked profits before precipitous falls, in which case I recommended sitting still through the turmoil. I will also get word to you via a Flash Alert if events turn too quickly.
Silk is built around a set of core themes. I often revisit those themes or certain analyses through a link to a previous article or by reproducing relevant paragraphs. You can also read previous issues in the Archives to gain an understanding of the investment philosophy of the publication.
Or you can ignore my advice and try to find the next big hitter the Portfolio will produce. You may succeed, but be aware that I don’t play that game; “fast guns” are wasting their time with this publication, as well as Asia and the rest of the international markets as an asset class.