Postcard from... the Philippines: assessing the Duterte effect
November is typically a busy month for us given company meetings post Q3 results and prior to the Christmas holidays and subsequent year-end closed period.
In this vein, we paid a timely trip to the Philippines (it was post the latest strongly worded anti-USA tirade and China trip love-in from President Rodrigo Duterte).
The purpose of the trip was to see if we should pick up favoured names if the market had a serious wobble on “Duterte Harry” worries.
In general, the picture, however, was one of caution and we left feeling the trends we are seeing in the rest of the region are equally prevalent in the Philippines despite the high hopes for the country from many Asian strategists.
The consumer stocks we met, like many in the region, highlighted issues with rising competition and weaker-than-expected end demand as the trickle-down effect of relatively strong economic growth remains patchy.
Typical of this was Universal Robina (URC), a well-run snack and instant coffee maker. Growth has slowed, the benefits of margin expansion from lower commodity prices has run its course and more competition both at low and high end is now hitting the company.
To try and offset this, URC and several similar companies in Asia have made overseas acquisitions. This includes falling into the potential pitfall of buying companies from private equity owners which have been dressed up for sale (putting lipstick on a pig is perhaps a better analogy in some cases; fund management 101: be cautious when buying from private equity owners!).
As mentioned, URC is a good company but it also confirmed the challenges we think face nearly all consumer names in Asia, e.g. weak nominal growth, deflation, and competition.
It is also quite clear to us that millennials do not want to necessarily consume the same brands as their parents – they are indeed different and are clearly not responding to traditional advertising and brands.
The problem global companies face in addressing millennials are equally prevalent in Asia. We continue to think the high valuations attributed to most Asian consumer stocks – on the basis that they will have “safe” earnings growth of 10-15% per annum into perpetuity – are misplaced.
Bricks and mortar
The Philippine property stocks were more interesting and, perhaps, surprising. Despite the high hopes and sky-high popularity domestically of Duterte, the residential property market has rolled over and confidence in the property market is faltering.
Prices are now falling and backlogs rising as oversupply and investment demand (aka speculation) wanes. All the property companies were delaying launches and talking about buyer incentives. This is a similar picture to what we have seen in all other ASEAN markets, Taiwan and Korea.
Overall, it was a cautious trip to the Philippines. Normally, we would ignore politics as noise but President Duterte is clearly unnerving the business community and there was talk of Business Process Outsourcing (BPO) projects being put on hold and US companies in particular turning cautious on new investments.
It is early days to draw any definitive conclusions on Duterte and we would remind readers that democracy does indeed need to work differently in those emerging countries where corrupt legal systems and rotten politics are a problem.
There are also good, competent people in the new Philippine government so we watch with interest. For the stockmarket, however, given high valuations and the cautious tone of our meetings we will need to see significant falls in most share prices for them to get to interesting levels.