On Friday, January 11, Mr. Toto Cruz of IGC Securities (Broker Code: 140) made a presentation to institutional brokers, analysts and fund managers on their outlook for Philippine Equities in 2008. What follows are some excerpts from that talk which might indicated the flavor of institutional fund strategy in 2008.

Summary

The salient points of the presentation are:

• The world economy continues to be healthy and the US can avoid a recession in 2008.
• The bull market may be aging, but in its early stages.
• Growth premium in emerging markets over developed world will continue.
• Equities in 2008 will remain to be an attractive investment amidst low bond yields and reasonable corporate earnings outlook.
• The Philippine growth story remains compelling.
• Focus on companies with solid earnings stream and consistent dividends is key: The Model Portfolio
• Opportunities in Mining and Oil Sectors.

US/World Economic Outlook

The expected state of the US economy vs. the world will continue to be a crucial cornerstone of any argument for equities to which the presentation featured the following items:

• World PE currently stands at 16.7x, among the lowest since early 1980s, when bond yields were much higher – Goldman Sachs
• S&P 500 trades at 14.6x 2008 earnings– well below average P/E of 18.6x during times when inflation was at similarly muted levels in the past 57 years.
• The Dow has gained an average 18% over one year in the 14 previous times since 1921 that the Fed has cut interest rates 3 meeting in a row.
• Fed rate to fall to 3.5% before rising again in mid-2008. – Jeremy Siegel
• Wall Street has risen by an average of 8.8% in presidential election years since 1926.
• Clearly, bargains can be had as demonstrated recently by ‘sovereign-wealth’ investment funds (all from Asia):
• Abu-Dhabi Investment’s $7.5b (4.9%) investment in Citigroup
• Singapore Investment Fund’s $9.75b (9%) investment in UBS AG
• Citic’s $1b (6.6%) investment in Bear Stearns
• China Investment’s $5b (9.9%) investment in Morgan Stanley
• Temasek’s $5b investment in Merrill Lynch

Philippine Economic Outlook

Focusing on the Philippine macro factors, all indications continue to be positive for the local economy:

• GDP the strongest In 2 decades.  1st nine months 07 GDP at 7.1%, bouyed by consumption and services.
• Peso back to year 2000 level.  Appreciation of 16% in 2007 the best performance in the region.
• Net FDI for 2007 better than target.  To register $2B vs target of $1.1B.
• Budget surplus registered.  1st 11 months budget surplus of P12.6B, primarily due to the sale of the govt’s stake in PNOC-EDC.
• Benign inflation of 2.8% in 2007.  Better than target of 4-5%, despite record price of oil.
• Exports continue to show growth.  Growth of 5.4% in the 1st 10 months of 2007, despite dollar weakness.  Trade deficit for the same period of $3.4B is even lower by $26M from a year ago.
• Unemployment rate continues to improve.  Registered 6.3% in Oct07, from 7.3% a year ago.
• Corporate earnings still strong.  Up 24% in the 1st nine months for all listed companies.

Equity Strategy: Model Portfolio

On specific equity strategy, Cruz outlined their approach:

1. Emphasis on the following major approaches:
2. Bottom-up Analysis
3. Diversification
4. Balance of growth and stability
5. Good fundamental story, which include: 
• Sustained earnings stream
• Consistent dividends
• Reasonable valuations

In line with the strategy nuances, a model portfolio was presented as follows:

Based on 2007 full-year results, some new stocks are also being considered as candidates for the model portfolio:

Forecasted performance of the model portfolio as well as historical performance against the PSE Index as benchmark:

2008 Opportunity: Oil and Mining

Recent developments in the Oil and Mining sectors present opportunities for growth in 2008. Cruz presented comparative numbers on the following stocks:

Oil: Galoc Field

For Oil opportunities the focus is on the Galoc Field production.

• Believed to be the next Malampaya
• Particularly significant, being the first offshore oil field development to be undertaken in Philippine waters in the last 15 years
• Initial capital investment of $86m
• Project payback: 4 months
• The initial phase of development identified reserves of approximately 10 mmbbls.
• Successful initial drilling phase at Galoc
• First oil production by 1Q08
• Initial production rate of 17.5k bopd for the first 12-24 months
• The country produces 23k bopd and consumes 338k bopd

Mining: Priority Projects

On the mining front, the presentation focused on 24 priority projects in various stages of development which merit close attention:

1. Operating Stage
   Palawan Nickel Project
   Rapu-Rapu Polymetallic Project
   Teresa Gold Project
   Canatuan Gold Project
   Padcal (Sto. Tomas II) Copper Expansion Project
2. Construction and Development
   Adlay-Cagdianao-Tandawa Project
   Didipio Copper-Gold Project
3. Final Feasibility and Financing
   Akle Cement Project
   Carmen (Toledo) Copper Project
   Masbate Gold Project
   King-King Copper-Gold Project
   Nonoc Nickel Project
   Far Southeast Gold Project
   Itogon Gold Project
4. Pre-feasibility and Advanced Exploration
   Siana Gold Project
   Colet Copper Project
   Tampakan Copper Project
   Boyongan Copper Project
5. Exploration
   Diwalwal Direct State Development Project
   Pujada Nickel Project
6. For Bidding
   Batong Buhay Copper-Gold Project
   Amacan Copper-Gold Project
7. For Rehabilitation
   San Antonio Copper Project

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