Tuesday, 15 May 2012

PHL and the euro crisis

Business Mirror

A common mistake that people make when trying to design something completely foolproof is to underestimate the ingenuity of complete fools.—Douglas Adams
WITH the local stock market heading south at a fast rate, it might be more appropriate to look at the internals of the listed companies and the macroeconomic picture of the Philippines to understand the “why” behind the drop.

But investors are just people whose decisions are influenced by what they read and hear not unlike your buying a particular brand of toothpaste because of the advertising.

The recent advertising about the stock market and the recent fall in prices has centered on the ongoing “euro crisis.” And like all advertising, it is not the whole truth nor is there the mention of a direct correlation and relationship to the Philippines.

The euro and the euro economic community was designed to be foolproof. But the fools in several individual countries have broken the financial system probably beyond repair.

Europe has a disease not unlike cancer. The outward symptom is found in Greece. This is a bankrupt government burdened by too much debt coming from absurd amounts of spending using borrowed money on programs that did not create any wealth and did not add anything meaningful or substantial to the economy.

The disease itself is found in Spain and its banking system. Spain, the 13th largest economy in the world, has just taken over Bankia, the nation’s fourth largest bank. Bankia was a government creation made from several of Spain’s cajas, or regional banks. These cajas are worse than any Philippine rural bank. Virtually unregulated, the cajas gave loans to any one regardless of their ability to pay. Some of the cajas had defaulted real-estate loans equal to 80 percent of their loan portfolio.

Remember when we were concerned when major Philippine banks had nonperforming loans (NPL) at 8 percent to 10 percent of their total loan portfolio? Overall, Spanish banks are now running at an NPL rate of 20 percent of their total capital or value. US banks are shut down when their nonperforming loans are at 5 percent of their capital.

Spain needs and will have to borrow an amount equal to 25 percent of their total annual economic activity to support their banks and that amount is for this year only.

And all the other euro banks are also in bad shape since they lend to each other. Worried about your local stock portfolio? Société Générale, the major French banking group, has seen its stock go from €140 to €17.20 since 2007.

The European banking system will not fail but the effects will cause those economies to go from bad to worse. For the short term the European stock markets are going to be disaster areas.

The European Central Bank has no choice but to pump a couple of trillion euros into the global money supply.

What this all means for the Philippines is very little “bad” and a lot of “good.”

The PHL economy is not dependant on Europe for any significant amount of its economic activity. We are Pacific centered including Asia and the US. Local banks have very little exposure to the European lending system.

However, some positives are already being seen in lower oil prices as decreased economic activity lowers demand for oil. Local companies are not looking to Europe for any significant share of their revenues.

As for our local stock market, subscribers to my web site were told weeks ago that when the PSE stock index reached 5,300 that would be a good place to consider a chance for some downward correction after the great price advance through the first quarter of the year.

Stock prices are not falling directly because of Europe’s problems. But there may be a side effect of constantly being told that we should be afraid of the euro crisis.

E-mail to mangun@gmail.com, web site is www.mangunonmarkets.com, and Twitter @mangunonmarkets. PSE stock market information and technical analysis tools provided by COL Financial Group Inc.

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