For the 3rd installment of my 2016 Outlook series, I am honored to present the views of the CEO of one of the largest insurance companies in the country today, AXA Philippines.

————–

The 2016 Outlook of Rien Hermans

This 2016, I see several positive factors across the key markets. They inevitably come with various degrees of risk as these markets undergo various political and economic transitions.  This year will be by no means smooth sailing and the volatility of the market will be high, but quite clearly, there are several growth opportunities over the medium and long-term that seem to offer stable growth.

China’s economic slowdown— and its subsequent impact in markets across the globe— has created concerns, with the recent stock market lock-down seeming to reinforce a growing aversion for China exposure. But while its days of hyper-GDP growth are over, the Chinese economy is still expected to grow reasonably well 2016 and beyond, subject to the Chinese government’s ability to implement the proper reforms. Volatility is to be expected as it transitions from a manufacturing-reliant economy, to a more sustainable consumption driven one.

This transition will inevitably impact most emerging markets, particularly those in Asia. But as a whole, Asia is still expected to drive global growth over the next 3 years. The Philippines and its consumption driven economy in particular, remains well-positioned for a defensive economic theme amidst the global volatility. Understandably, the eventual results of the presidential election may potentially impact the degree of acceleration, but will not alter the upwards trajectory.  The country’s economic fundamentals remain on solid footing, and shall remain through the political transition, pointing to sustainable economic growth.

The US has been recovering and recent figures show modest economic growth, which is expected to continue in the coming years and allows a slight increase in interest rates. The dollar can further strengthen against both the Euro and the Peso. The stock market in the US, which has been recovering over the past two years, is expected to show a slight positive growth, with the expectations that sectors like the digital oriented stocks will outperform.

I expect the European markets to outperform the global markets in 2016, as Europe has clearly started its recovery and economic growth is expected in the major economies within the Euro zone. This will further be accelerated by the stronger competitive position as a result of the lower Euro.

This 2016, the best strategy seems to be to diversify and have a long-term mind-set.  Balance investments among markets with a strong consumption theme, like the Philippines, while considering developed markets like Europe and include some exposure in US-denominated funds to benefit not only from the growth of the overseas markets, but also from the stronger currency.

—————–

Convinced of the value that financial products deliver to customers Rien has spent over 2 decades  in the financial service industry in the fields of product development, distribution, marketing, strategy and general management.  

In 1990 he started with ING Bank in the Netherlands, where he was responsible for developing and implementing Life insurance as a new product group offered by the bank. His analytical skills and strategic vision were recognized and for 4 years he was vice president Strategy & Planning advising the Board of ING on strategic issues.

In 1999 he moved to Asia and after a short stint in Hong Kong he was assigned as the CEO of ING Life as well as CEO of Aetna Life & Healthcare in the Philippines, Executive Director and General Manager of ING Malaysia and the last position he held in ING was Board Member of ING Financial Services Poland.

In 2009 Rien ‘crossed the line’ and joined AXA with the assignment to transform AXA Philippines into a strong player on the domestic market with a sustainable position in the top 5. Focused to be the best in the eyes of the customers the company has strengthened its position in the growing life insurance and investment market in the Philippines.   

This installment will showcase the views of James Lago of PCCI Securities Brokers Inc.

James is one of the most insightful and in-depth analyst I know and this is because he sees things from a big picture approach being an economist and an analyst at the same time.

—————-

Economy – For 2016, our initial GDP growth forecast range is 5.8% –
6.0%. This baseline assumption is premised on the following growth
rates of the major industry groups: industry growing by about 5.3%,
services expanding by 6.0% and agriculture posting a 1.0% growth. On
the expenditures side, we see household spending (HFCE) rising by 5.9%
– 6.4% as the continued decline in energy prices will still translate
to additional disposable income. The major election year historical
contribution to GDP is likewise considered.

Should the lower energy prices environment continue, we forecast 2016
inflation to remain manageable. Factoring in our anticipated
peso-dollar exchange rate this year, our initial yearend CPI range
forecast is 146.0 – 147.0 resulting in an average inflation forecast
ranging from 2.0% – 2.3% using the 2006 base year.

PSEi – The bullish trend since its recovery in 2009 remains intact. A
new historic high of 8,136.97 was recorded as the bull market entered
its 7th consecutive year last year, surpassing our most optimistic
estimates but was certainly short-lived.

2015 starts with an unfolding minor correction phase and the leading
relative valuations still above its historical averages, and at a
premium to the regional average anew. Since only a 23.8% correction
of the 2009 – 2015 uptrend was achieved, the corrective phase may
still continue in to 1H 2016 before a real rebound unfolds. Most
corporate earnings will continue to improve even at a base case of a
slower growth rate compared to 2015. Our base case scenario for the
PSEi this year is minor supports of the ongoing healthy correction at
6,200 and 6,000 before a recovery to 7,000 – 7,300. Undoubtedly, the outcome of the Presidential elections will sway investor confidence.

Peso – The peso depreciated as expected last year as international
investors continued to move back to dollar assets.Net portfolio
outflows primarily from equities, weak net FDI flows and lower export
receipts sent the peso to a 47.49 low, way past our 46.00 – 47.00 base
case scenario.

For this year, we see the ICE dollar index rising to at least 101.50,
as funds continue to flow back into US dollar assets given the FOMC’s
gradual interest rate normalization. The pace should not be as severe
as that in 2015. With this, our base case scenario therefore for the
peso is a depreciation to around 48.00 that will result in a 76.4%
retracement of its October 2008 – January 2013 appreciation. A further
depreciation to 49.00 is possible if the former is surpassed. While it
is currently at equilibrium at around 47.00, an appreciation back to
46.00 or even 45.00 is possible.

The PBOC’s managed weakening of the renminbi (or yuan) will not
significantly impact on the peso. We were not surprised by this
development after their initial action in August last year as the PBOC
is guiding China’s currency to a level that it believes will be
appropriate given several variables. Our base case scenario for the
renminbi is an eventual return to the RMB/CNY6.80
level.

Domestic Fixed Income Yields – Real returns on the short-term yields
turned positive by mid-year last year as inflation slowed and
investors took profits price-wise to demand higher yields ahead of the
U.S. Fed’s interest rate normalization. The yield curve underwent a
nonparallel upward shift and remained a normal yield curve at yearend.
The spread between the average short and long-term yields spread was
below our 200 – 250 bps range expectation throughout last year as the
medium and longer tenor yields did not move up significantly.

For 2016, the yield curve is also seen to remain essentially normal
with yields ranging in between early-2012 to 2013 levels. The spread
between the average short-term and long-term yields might move within
a 150 – 200 bps range and investors will continue to be opportunistic
to find ways around the yield levels. We expect corporate debt raising
and preferred shares offerings to continue this year as rates remain
affordable vis-à-vis historical levels coupled with the gradual rate
hike path in the U.S.

Portfolio Strategy – Our overall core equity strategy remains anchored
on the soundness of a firm’s core business model and its stock’s key
relative valuations, PER and PBV, trading at a discount to the PSEi’s
averages. It is also worth looking into some key index heavyweights as
the valuation premium have narrowed to reasonable levels versus the
PSEi’s averages

Taking account as well of a generally bearish market scenario and a
consumption driven GDP growth that will get an added lift from
election-related spending, high dividend yield, non-cyclicals and
baseline consumer stocks are on top of our recommendations. Should a
firming up of global equities markets occur by midyear, there should
be no hesitation to switching from a dividend yield play to capital
appreciation to improve total return.

Our recommendation for fixed income investors is still to spread out
investments over the offerings this year and several tenors for
diversification. Short-term yields are now at attractive levels
vis-à-vis inflation expectations. Positive real returns may be
harvested again.The suggested average tenor or duration of the
portfolio is it is skewed to the relative middle of the middle-tenor
ranges given that yields across the yield curve range at the start of
2016 are attractive.

Joseph James Lago is AVP of the PCCI Securities Brokers Corp. He has over 2 decades of experience in the investments industry in various capacities. He is also a professor of the De La Salle University Graduate School teaching in Management and Economics. He is a much sought after researcher, economist and analysts. He is a Registered Financial Panner.

As I end the 2012 Outlook series, I am proud to feature the views of a highly respected academic and economist from the University of Santo Tomas. I had the privilege to meet and collaborate with Mr. Alvin Ang and I admired his astute grasp on economics. However, more than his brilliance in his field, I admired the heart of Alvin — in the academe and in his desire to make a better life for our brothers and sisters. He is someone who I hope was my teacher in my student years, but its never too late to learn from a brilliant guy who has a heart of gold.

The 2012 Outlook of Alvin P. Ang

Few weeks into 2012, the fluidity of the global and local markets make it difficult to even give a quarterly outlook on the economy and markets. Nonetheless, there are general trends that we could follow and assess their direction through the year. Let me focus on the 3 critical components of the economy.

First, GDP growth. GDP growth for 2011 will likely fall around the 3.5 and 4.% forecast made by agencies and fellow economists. This expected growth is respectable considering that the economy treaded a difficult global scenario brought about by the political problems in the Middle East, the Eurozone debt problems, the tsunami in Japan, lower exports and our own local political concerns. Growth drivers remain to be the components of the service sectors boosted by demand in the tourism, finance, real estate and the BPOs. For 2012, tourism will be on overdrive with expected external demand for Palawan and the direct flights to Kalibo by regional airlines. This industry’s huge forward and backward linkages will spur hotel and leisure activities, apart from travel. With construction taking time, rentals in tourist destinations will surely be boosted. BPOs also continue to expand albeit selectively in highly trained skilled manpower. The flock to quality of BPOs ensure that the threat of US withdrawal will not significantly affect the country. Meanwhile, the local manufacturing sector continues to consolidate due to the China and fellow ASEAN dominance of the global industry. But the Philippines continue to have competitive advantages in the food, beverage, furniture and paper industries. These will continue in 2012. OFW remittances continue to be resilient despite global challenges. Studies have revealed that it is countercyclical to crisis particularly where the OFWs are located. For 2011, it is expected to have reached US$23Bn growing at about 7%. Although this has slowed down from recent years, in absolute numbers it has breached more than 1/3 of total exports. A growth of 5% in 2012 will surely be achievable. These sectors will continue to lead growth for 2012, especially as the country shakes its weak institutional and capacity image abroad. Foreign Direct Investments (FDI) will likely reconsider the country as the transparency and corruption-cleaning of the government take effect. The improvement in the perception of the country’s capacity is a crucial ingredient in ensuring sustainability of growth in the medium to long-term. The investment of the current government in this direction is a step in the right direction. Thus, 2012 growth will most likely better 2011 to between 5 to 5.5%.

For 2012, two critical indicators remain important challenges. Inflation is under threat from the fluctuating oil prices. The BSP will take a stance to ensure that it oscillates around the 4.5 to 5% band. With the new basket and base year (2006), food share to the CPI basket has declined from 42% to around 37%. Housing and related expenses remain above 20% and transportation increasing to close to 10%. Managing inflation will entail ensuring adequate food supply chain and stability of oil prices. The focused manufacturing and services sectors do not have enough demand for funds and the ease of raising funds through the bond markets by the conglomerates will continue the low interest rate regime for 2012. This is coupled by the government’s good cash position as shown by the average 91 T-Bill rate of less than 3% – the lowest in decades. Foreign exchange, on the other hand, will likely hover around 43.50 to 44 as the supply of OFWs temper the rising demand of imports for raw materials and capital expansion. The global uncertainty will continue to make precious metals a safe haven for long term liquidity. Gold reached all time highs in 2011 and will likely attempt it again this year.

Lastly, unemployment continues to be the bane in the economy. The limited growth drivers and the large and institutionalized educational system in the country are causing supply choke points. It is critical for the government to ensure sustainable growth to create an environment for long term employment. The recent improvement in the economic freedom ranking gives the hint where to focus. A fast, reliable and standardized business registration system all over the country remains the single most important obstacle for business growth and employment generation. Efforts to making this a reality is underway in different fronts. a fully operational public-private partnership coupled with renewed vigor of government expenditures will be great signs for this year. A special focus on disaster preparedness and management is also a crucial government activity. Overall, 2012 is a breakout year for the economy – rebuilding the base and renewing confidence in both local and international investment are taking roots for a better medium to long term outlook.

Alvin P. Ang has more than 20 years of professional experience in both public and private sectors.  He started his Economist experience with the National Economic and Development Authority (NEDA) of the Philippines where he developed his skills in Development Planning, Policy Formulation and Analysis.  He also worked in Investment Research and Economic Forecasting with his stints at the Philippine National Bank and All Asia Capital as Chief Corporate Planner and as Economist, respectively.  Within those periods, he has been teaching part-time at the University of Santo Tomas in Manila.  In 1999, he joined the academe as full-time Faculty member after completing his Master in Public Policy at the National University of Singapore as a Scholar of the Singapore Government.  He went on to complete his Ph.D. in Applied Economics at Osaka University in 2006 as a Japanese Government Scholar.  He has published in renowned journals such as the Review of Development Economics, Asia Pacific Social Science Review, among others.  His research fields are in Labor and Development Economics and his research interests include Privatization and Development Finance.  His researches on Remittances and Economic Growth in the Philippines have been widely circulated.  He has also consulted for the World Bank, World Health Organization, the European Union, Asian Development Bank, International Labour Organization and the USAID on policy matters. He recently won the first prize (together with Jeremaiah Opiniano) in the Outstanding Research for Development in the 2011 Global Development Awards (besting 400 entries worldwide)  held in Bogota, Colombia.  He is a lifetime member of the Philippine Economics Society where he currently is Vice President.  He is an advocate of responsible personal finance and has lectured on this topic in many fora.  Presently, he is Director of Research for Culture, Education and Social Issues and a Full Professor of Economics at the University of Santo Tomas and Visitor Professor at the Ateneo School of Government.