The institutionalisation of Bitcoin - 17 December 2020 - Mercury Redstone
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17 December 2020
The institutionalisation of Bitcoin
Verbier
If 2020 has been the year of Covid-19, it has also been the year of Bitcoin. Indeed it is the year when Bitcoin
has come of age.
This report is intended for kurt.martinson@locustwood.com. Unauthorized distribution prohibited.
GREED & fear is not only talking about price performance, though clearly that has been impressive with Bitcoin
up 474% from the March low and 214% year to date (see Exhibit 1), including a 9.2% gain yesterday while
GREED & fear was writing this! Rather what GREED & fear means is that this is the year Bitcoin has become
investible for institutions with custodian arrangements available and with prominent investors and indeed
institutional investors declaring that they have bought it. In this respect, Bitcoin has now become part of the
system with opportunities also for retail investors to buy into it via quoted vehicles, be it the Greyscale Bitcoin
Trust in America or the recently launched VanEck Vectors Bitcoin ETN traded on the Frankfurt exchange.
Exhibit 1: Bitcoin price
Source: Bloomberg
This is important since, before such arrangements were in place, there was always the risk that Bitcoin
accounts could be hacked. The other risk, of course, was that Bitcoin would be declared illegal because it was
used for nefarious purposes, such as illegal narcotic transactions. Still an asleep GREED & fear has only just
been made aware by a friend of the most remarkable development in this area, though it happened four
months ago. That was the announcements in mid-August and September by the Nasdaq-listed MicroStrategy,
a business intelligence software company, that it had invested in the Bitcoin equivalent of US$425m
(US$250m in August and US$175m in September), amounting to almost 100% of its own treasury funds, to
hold on its balance sheet. The aim is to make Bitcoin “the primary treasury reserve asset on an ongoing basis”,
along with cash and short-term investments, according to the company’s official US Securities and Exchange
Commission (SEC) approved Form 8-K. MicroStrategy invested a further US$50m in Bitcoin in early December,
with a cumulative holding of 40,824 Bitcoins.
Please see analyst certifications, important disclosure information, and information regarding the status
of non-US analysts at the end of this report. 1
*Jefferies Hong Kong Limited
This marks a watershed moment in GREED & fear’s view since the auditors approved MicroStrategy putting
Bitcoin on its balance sheet as did the SEC. Now it is true that the far more famous Square also announced in
October that it was investing US$50m in Bitcoin but that only amounted to 1% of the Silicon Valley company’s
assets. Such a small investment probably did not even have to be reported but in MicroStrategy’s case that
was certainly not the case.
GREED & fear must admit to never having heard of MicroStrategy previously. But the company seems to have
been investing in technology and software for 31 years. Since announcing its investment in Bitcoin, the
company’s market capitalisation has risen by 131% to US$2.77bn (see Exhibit 2) and the value of its Bitcoin
holding has almost doubled to US$917m. Intrigued by the motivation behind this investment, GREED & fear
decided to do something GREED & fear seldom does. That was to listen to a “podcast” featuring an interview
with the highly articulate CEO and co-founder of MicroStrategy, Michael Saylor. He is, by the way, no fast
money operator since he has been a public company CEO for 22 years since MicroStrategy’s listing in 1998.
Exhibit 2: MicroStrategy market cap
3,500 (US$m)
MicroStrategy market cap
3,000
2,500
2,000
1,500
1,000
500
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20
Source: Bloomberg
The most amazing revelation is that he only started to look at Bitcoin in 2019, which is a lot later than GREED
& fear. He made the decision to invest the company’s funds in Bitcoin as a store of value in the spring after
seeing the monetisation triggered by the Federal Reserve’s extreme policy response to Covid-19, and then was
able to convince his fellow directors and get the lawyers and auditors to execute the process in a period of
only ten weeks.
Saylor views Bitcoin as the “ideal Treasury reserve asset”. But, more worryingly to people like GREED & fear
who own gold, Saylor argues that Bitcoin is “destroying gold’s value proposition” because Bitcoin has
“dematerialised gold”. GREED & fear has to admit that this argument has some real merit. GREED & fear has
commented before on several occasions that ownership of gold and Bitcoin are not mutually exclusive and
appeal to different generations (i.e. boomers and millennials). But gold bugs have to face up to the real risk
that risk averse capital, which would have otherwise gone to gold to hedge the obvious ongoing fiat paper
currency debasement in the G7 world, will now go to Bitcoin. In fact that process has already begun.
Meanwhile the brutal fact is that since the policies of extreme currency debasement began in America, which
GREED & fear will take from the commencement of quanto easing under Billyboy in late 2008, Bitcoin has
outperformed gold by 177,000-fold (see Exhibit 3). It is also the case that the supply of Bitcoin is shrinking,
under the quantitative tightening dynamic, which is certainly not the case with gold.
17 December 2020 2
Please see important disclosure information at the end of this report.
Exhibit 3: Bitcoin price/gold price
16 Bitcoin price / Gold price
14
12
10
8
6
4
2
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Bloomberg
This does not mean that GREED & fear is going to give up on gold. And the yellow metal should rally again if
the Fed stays doveish in the face of the dramatic cyclical recovery that is coming on the other side of the
pandemic, in line with GREED & fear’s base case. But GREED & fear is now going to do what GREED & fear
should already have done since owning Bitcoin was first recommended here back in June 2019 (see GREED
& fear - The dollar spasm, 27 June 2019), and since it became evident that institutional acceptable ways of
owning Bitcoin were becoming available. That is to introduce an investment in Bitcoin in GREED & fear’s long-
only global portfolio for US dollar-denominated pension funds, established at the end of 3Q02. The 50%
weighting in physical gold bullion in the portfolio will be reduced for the first time in several years by five
percentage points with the money invested in Bitcoin (see Exhibit 4). If there is a big drawdown in bitcoin from
the current level, after yesterday’s historic breakout above the US$20,000 level, the intention will be to add to
this position.
Meanwhile there is no need for GREED & fear to apologise for the original investment in gold when this portfolio
was launched at the end of 3Q02. It was made at the price level of US$323/oz.
Exhibit 4: Recommended long-only asset allocation for US-dollar-based pension funds
Weight (%) Investment type
45% Physical gold bullion
30% Asia ex-Japan equities, weighted according to the long-only thematic portfolio
20% Unhedged gold mining stocks
5% Bitcoin
Source: Jefferies
Returning to the more mundane subject of Federal Reserve mumbo jumbo, the latest Fed FOMC meeting on
Wednesday indicated a slightly less doveish outlook as a consequence of the vaccine news. But GREED & fear
is only talking about at the margin. The 2% inflation target is still projected not to be reached until 2023 while
most Fed governors assume shot-term rates will remain near zero for at least three more years.
GREED & fear repeats the point that by far the most important issue for financial markets in 2021 is how the
Fed responds when presented with evidence of cyclical recovery, as pent up demand is unleashed on the other
side of the pandemic. GREED & fear’s base case is that the Fed remains doveish even if only because the
system cannot afford higher rates. But it will be hard for Pivot to admit to this. The goal of the Fed’s new
forward guidance is seemingly to avoid the kind of market backlash that occurred in 2013, according to a Wall
17 December 2020 3
Please see important disclosure information at the end of this report.
Street Journal article today (“Fed Reinforces Stimulus Will Be Open-Ended to Spur Recovery”, 17 December
2020). So far as GREED & fear is concerned, any hint of tapering will lead to a taper convulsion, not a tantrum.
Investors everywhere need to understand this.
Back in Asia, sentiment amongst foreign investors towards Korea turned much more positive this quarter as
the focus turned to owning cyclicals. This was reflected in foreigners turning largescale net buyers of equities
after having been net sellers for the preceding six quarters. Foreigners have bought a net W4.1tn worth of
Korean equities so far this quarter, after selling a net W34tn in the previous six quarters (see Exhibit 5). The
ironic point to GREED & fear is that foreigners entered the market after retail investors had been active buyers
all year, a point which has been highlighted in recent months by Peter Kim, investment strategist at Jefferies’
new Korea research partner, KB Securities. Domestic retail investors bought a net W58.8tn in the first three
quarters of 2020 and a further W5.4tn so far in 4Q20 (see Exhibit 6).
Exhibit 5: Quarterly foreign net buying of Korean stocks
10 (Won tn) Foreign net buying of Korean stocks
5
0
(5)
(10)
(15)
(20)
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Source: Bloomberg
Exhibit 6: Domestic retail investors' net buying of Korean equities
30 (Won tn) Domestic retail investors' net buying of Korean stocks
25
20
15
10
5
0
(5)
(10)
Sep-16
Sep-17
Sep-18
Sep-19
Sep-20
Jun-16
Jun-17
Jun-18
Jun-19
Jun-20
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Dec-16
Dec-17
Dec-18
Dec-19
Dec-20
Source: Bloomberg
The result of the renewed foreign enthusiasm is that Korea is at present the best performing market in Asia
Pacific ex-Japan year-to-date, a performance also helped by a 6.9% appreciation of the won against the US
dollar this quarter. The MSCI Korea has risen by 30.3% in US dollar terms so far this quarter and is up 35.5%
year-to-date, compared with a 16.2% gain quarter-to-date and a 17.2% gain year-to-date in the MSCI AC Asia
17 December 2020 4
Please see important disclosure information at the end of this report.
Pacific ex-Japan Index. This is Korea’s biggest outperformance against the rest of the region in a quarter since
3Q05 (see Exhibit 7).
Exhibit 7: MSCI Korea relative performance against the MSCI AC Asia Pacific ex-Japan
Source: Datastream
The above is a reminder that Korea remains extremely geared to the external cycle despite all the negative
focus in recent years amongst investors, as well as GREED & fear, on the socialist redistribution policies of the
Minjoo Government elected in May 2017. It is also the case that these policies no longer look so extreme given
the policies implemented in the G7 world in response to the pandemic. As for the cyclical gearing, exports
have started to turn up. Total exports rose by 4.1% YoY in November, while exports to China rose by 1.2% YoY
(see Exhibit 8).
Exhibit 8: Korea export growth
40 (%YoY, 3mma)
Korean exports Exports to China
30
20
10
0
(10)
(20)
(30)
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Oct-18
Oct-19
Oct-20
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
Apr-20
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Jul-17
Jul-18
Jul-19
Jul-20
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Source: CEIC Data
Traditionally Korea was a geared play on the OECD cycle. But this has changed significantly in recent years as
the share of exports going to emerging markets has increased dramatically. Emerging markets accounted for
62% of total Korean exports in 2019, up from 40% in 2000. By contrast, G7’s share of Korean exports has
declined from 43% to 24% over the same period (see Exhibit 9). China and Vietnam, for example, now account
for a combined 34% of Korean exports, compared with 13.5% for America (see Exhibit 10). This is a positive
dynamic, not a negative one, given the growing contribution of China and the emerging world to global growth.
Still the rally, and the retail contribution to that rally, means that Korea is no longer as cheap as it traditionally
has been. The MSCI Korea now trades on 13.4x 2021 consensus earnings based on 42% forecast earnings
17 December 2020 5
Please see important disclosure information at the end of this report.
growth (see Exhibit 11). It is also worth noting the renewed decline in RoE in recent years though this should
be bottoming out. The Kospi ROE fell from 9.7% in 2017 to 4.3% in 2019 and is projected to rise to 11.5% in
2021, according to Bloomberg (see Exhibit 12).
Exhibit 9: Share of Korean exports (Emerging markets vs G7)
65% Exports to emerging markets Exports to G7
60%
55%
50%
45%
40%
35%
30%
25%
20%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: CEIC Data
Exhibit 10: China, Vietnam and US shares of Korean exports
50%
USA China Vietnam
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: CEIC Data
Exhibit 11: MSCI Korea 12m forward PE
14 (X) MSCI Korea 12m forward PE
13
12
11
10
9
8
7
6
5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Datastream, IBES
17 December 2020 6
Please see important disclosure information at the end of this report.Exhibit 12: Kospi ROE
16 (%)
Kospi ROE
14
12
10
8
6
4
2
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: Bloomberg
Exhibit 13: Cumulative net inflows into Korea investment funds investing offshore
160 (Won tn)
140
120 Cumulative net inflows into Korean investment funds investing offshore
100
80
60
40
20
0
(20)
(40)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Korea Financial Investment Association (KOFIA)
Meanwhile the won’s recent strength, and the domestic stock market boom, has slowed down the previous
boom in investing in offshore markets discussed here a year ago (see GREED & fear - Kim and the appeal of
boring, 12 December 2019). Net offshore investment by Korean investment funds has totaled W21tn so far in
2020, compared with W45tn in 2019 and W24tn in 2018 (see Exhibit 13). The total amount invested by such
funds offshore is now W206tn (US$189bn). Still gung ho Korean retail investors have also bought a net
US$19bn worth of foreign stocks so far in 2020, of which US$16.8bn was in US stocks (see Exhibit 14). This
compares with net buying of “only” US$2.5bn of foreign stocks in 2019.
Finally, on Covid, Korea has so far continued to avoid complete lockdowns as the number of cases has
fluctuated, though of late there has been a notable deterioration. The 7-day average daily Covid case count
has surged from a low of 69 in early October to a record 908 on Wednesday, with the daily case count
exceeding 1,000 over the past two days. While the 7-day average daily death count has also risen from 1 in
late October to 10, with a record 22 deaths on Wednesday (see Exhibit 15). Still, total confirmed cases and
deaths are running at “only” 907 and 12 per 1m of population respectively.
17 December 2020 7
Please see important disclosure information at the end of this report.Exhibit 14: Korea retail investors net buying of foreign stocks
3,500 (US$m)
3,000
Other foreign stocks US stocks
2,500
2,000
1,500
1,000
500
0
-500
-1,000
May-11
Sep-11
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
May-15
Sep-15
May-16
Sep-16
May-17
Sep-17
May-18
Sep-18
May-19
Sep-19
May-20
Sep-20
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Source: Korea Securities Depository
Exhibit 15: Korea Covid-19 7-day average daily new cases and deaths
1000 12
Korea daily new cases, 7dma Daily deaths, 7dma (RHS)
10
800
8
600
6
400
4
200
2
0 0
23-Apr
21-May
12-Mar
26-Mar
19-Nov
13-Feb
27-Feb
8-Oct
18-Jun
16-Jul
30-Jul
3-Dec
9-Apr
30-Jan
7-May
13-Aug
27-Aug
2-Jul
5-Nov
10-Sep
24-Sep
22-Oct
4-Jun
Source: Korea Centers for Disease Control & Prevention
Exhibit 16: Philippines 7-day average daily Covid new cases and deaths
Source: Department of Health
Elsewhere in Asia, it is interesting to note that the Covid cases are down significantly in the Philippines and
now look to be well past the peak. The 7-day average daily Covid case count has declined by 72% from the
peak of 4,477 in mid-August to 1,272, while the 7-day average daily Covid death count has fallen by 80% from
17 December 2020 8
Please see important disclosure information at the end of this report.107 in mid-September to 21 (see Exhibit 16). The number of active cases also peaked at 83,109 in mid-August
and has since declined by 69% to 25,695. While hospitalisation rates are also way down. Nationwide ward bed,
ICU bed and isolation bed occupancy rates have declined from 58%, 56% and 54% in late July to 26%, 41% and
36% respectively (see Exhibit 17).
But, despite all this, the Philippines is ending 2020 still in various forms of lockdowns, most particularly Metro
Manila where public transport is still only operating at around 40% of capacity.
Exhibit 17: Philippines hospital bed occupancy rates for Covid-19
Source: Department of Health
The impact of the extended lockdowns continues to show up in the labour market. The national adult jobless
rate was still a horrifying 39.5% in September, though down from the peak of 45.5% in July, according to Social
Weather Stations (see Exhibit 18). The economic consequences of the lockdown also continue to be reflected
in third quarter data with real GDP declining by 11.5% YoY, though that was an improvement from the second
quarter which saw the biggest YoY decline (16.9%) since the quarterly data series began in 1981 (see Exhibit
19).
Exhibit 18: Philippines adult jobless rate
50 (%) Philippines SWS adult jobless rate
40
30
20
10
0
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Note: % of the adult labour force without a job at present and looking for a job. Source: Social Weather Stations
17 December 2020 9
Please see important disclosure information at the end of this report.Exhibit 19: Philippines real GDP growth
15 (%YoY)
Real GDP growth
10
5
0
(5)
(10)
(15)
(20)
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
Source: CEIC Data, Philippines Statistics Authority
Exhibit 20: Philippines fiscal balance as % of GDP
2 (%GDP)
0
(2)
(4)
(6)
(8)
(10)
2020F
2021F
2022F
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Source: CEIC Data, Bureau of Treasury, Development Budget Coordination Committee (DBCC)
As elsewhere, the Philippines has engaged in aggressive fiscal easing this year with a forecast fiscal deficit
of P1.4tn or 7.6% of GDP this year, the highest since 1985 (see Exhibit 20). But the real dramatic shift has
been in monetary policy where Bangko Sentral ng Pilipinas (BSP) has gone unorthodox, in terms of
implementing both quantitative easing and what Jefferies’ Philippine research partner Regis Partners calls
“direct monetisation”. The BSP’s direct purchases of government securities under repo agreements rose from
P300bn in March to P540bn in October and is expected to rise to P850bn in 2021, while the central bank has
since March bought an additional P1tn worth of Treasuries in the open market as of August, the latest data
available (see Exhibit 21).
The central bank effectively funded about 77-81% of the issuance of Treasury bonds in the first eight months
of 2020, according to Regis. The central bank has also said it will keep up its bond buying programme for at
least the next two years.
17 December 2020 10
Please see important disclosure information at the end of this report.Exhibit 21: BSP holdings of domestic securities (open market operations) and govt securities under repo agreements
3,000 (P bn)
2,500 Domestic Securities Gov't Secs Under Repo Agreement
2,000
1,500
1,000
500
0
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Oct-20E Jan-21E
Source: Bangko Sentral ng Pilipinas (BSP), Regis Partners
As for conventional monetary policy, the central bank has since February cut the overnight reverse repurchase
rate by 200bp to 2.0%, including a 25bp cut in November following a pause since July. It has also cut the
reserve requirement ratio by 200bp in late March to 12% and is authorised by the monetary board to cut a total
of 400bp in 2020. But no more RRR cut has been announced since then. The central bank kept its policy
unchanged in today’s monetary policy meeting.
The move to unorthodox monetary policy has been positive for the stock market, sending a clear message to
domestic fund managers to switch out of bonds and cash. Philippine M1 growth and M3 growth were 22.4%
YoY and 11.8% YoY respectively in October (see Exhibit 22). The result is that the stock market has rallied
sharply so far this quarter without foreign net buying. The PSEi Index has risen by 24.5% so far in 4Q20, while
foreigners have sold a net US$425m over the same period (see Exhibit 23).
This divergence is almost unprecedented for the Philippines. It in part reflects domestic equity funds
dramatically reducing their cash holdings during the second half of 2020. The estimated cash levels of local
funds have declined from 11.2% in May to 6.3% in October, according to Regis (see Exhibit 24).
Exhibit 22: Philippine M3 growth and M1 growth
40 (%YoY)
M3 growth M1 growth
35
30
25
20
15
10
5
0
May-10
Sep-10
May-11
Sep-11
May-12
Sep-12
May-13
Sep-13
May-14
Sep-14
May-15
Sep-15
May-16
Sep-16
May-17
Sep-17
May-18
Sep-18
May-19
Sep-19
May-20
Sep-20
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Source: CEIC Data, BSP
17 December 2020 11
Please see important disclosure information at the end of this report.Exhibit 23: Cumulative foreign net buying of Philippine stocks
Source: Bloomberg, Philippine Stock Exchange
Exhibit 24: Estimated local fund cash levels (% to NAV, AUM-weighted)
12%
10%
8%
6%
4%
2%
0%
Feb-17
Feb-18
Feb-19
Feb-20
Aug-17
Aug-18
Aug-19
Aug-20
Oct-17
Oct-18
Oct-19
Oct-20
Apr-17
Apr-18
Apr-19
Apr-20
Jun-17
Jun-18
Jun-19
Jun-20
Dec-16
Dec-17
Dec-18
Dec-19
Source: Various funds' fact sheets, REGIS estimates
From a valuation standpoint, the stock market is on 18x 12-month forward earnings based on the PSEi
universe. This is based on Regis’ assumption of a 90% return to normal by the end of 2021 in terms of
economic activity. A potential positive is that a pending tax bill, if implemented, will reduce the corporate
income tax rate from 30% to 25% retroactively to July 2020. If this occurs, it will increase the forecast earnings
growth by about 5-7 percentage points from the current Regis forecast of 34% in 2021.
If this is all positive, the risk next year for foreign investors is that the currency takes the pressure as a result
of the aggressive monetary easing. This risk will increase if rising commodity prices, particularly a rising oil
price, cause a rise in inflation at a time when domestic purchasing power is under pressure from the lack of
employment.
Still the peso has so far remained remarkably stable against a weak US dollar, though in a sign of vulnerability
it has begun to underperform other Asian currencies since mid-August. The peso has underperformed the
Bloomberg Asia Dollar Index by 3.5% since mid-August (see Exhibit 25). GREED & fear would certainly not have
a weighting in the peso or in Philippine bonds in an Asian currency or bond fund.
One explanation for the currency’s resilience of late has been evidence of capital inflow, as reflected in the net
errors and omissions item (or so-called net unclassified items) on the balance of payments. Net errors and
omissions rose from an outflow of US$2.83bn in 2018 to an inflow of US$3.88bn in 2019 and US$2.06bn in
17 December 2020 12
Please see important disclosure information at the end of this report.the first three quarters of 2020 though, significantly to GREED & fear, they fell to an outflow of US$709m in
3Q20 (see Exhibit 26). The most plausible explanation for this previous capital inflow remains mainland
Chinese money related to the offshore gaming boom, as previously discussed here (see GREED & fear - Asean
blues, 6 August 2020).
Exhibit 25: Peso performance relative to Bloomberg Asia Dollar Index
6 (%YTD)
4
2
0
(2)
Peso against US$
(4) Bloomberg Asia Dollar Index
Peso relative to Asia Dollar Index
(6)
May-20
Sep-20
Aug-20
Oct-20
Jun-20
Nov-20
Jul-20
Mar-20
Apr-20
Jan-20
Dec-20
Feb-20
Source: Bloomberg
Exhibit 26: Philippines balance of payments: Net unclassified items
8 (US$bn)
Net unclassified items Annualised
6
4
2
0
(2)
(4)
(6)
(8)
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: BSP
Still it now looks to GREED & fear as if the offshore gaming boom has peaked amidst growing anecdotal
evidence that Philippine offshore gaming operators (POGOs) are leaving, a trend which is already causing a
negative impact on both residential prices and commercial rents. Office rents have declined by 10-15% since
peaking in 1Q20, while residential condo prices are down 5-20% over the same period (see Exhibits 27 and
28).
There are two reasons. The first is a crackdown on POGOs from China. The second is that the Rodrigo Duterte
government imposed a 5% tax on turnover (i.e. the amount bet) in September.
17 December 2020 13
Please see important disclosure information at the end of this report.Exhibit 27: Philippines office spot rents
1,800 (P/sqm/month) Makati Premium Makati Grade A Ortigas Grade A BGC Grade A
1,600
1,400
1,200
1,000
800
600
400
1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20
Source: Colliers, Regis Partners
Exhibit 28: Philippines residential condo prices
350,000 (P/sqm) Makati Premium Rockwell Premium Bonifacio Premium
300,000
250,000
200,000
150,000
100,000
1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 1Q18 1Q19 1Q20
Source: Colliers, Regis Partners
The other risk to the peso is that it is simply not cheap. The real effective exchange rate has appreciated by
15.5% since February 2018 and is up 57% since 2004 (see Exhibit 29). Meanwhile a positive for the currency
and, more importantly, for an economy whose biggest export remains people, is that the remittances from
overseas workers have been much less badly hit by the pandemic than earlier feared. After an initial 19.3%
YoY collapse in cash remittances in US dollar terms in May which was the biggest monthly YoY decline since
January 2001, it is a positive surprise that remittance were only down 0.9% YoY in US dollar terms in the first
ten month of 2020 and were up 2.9% YoY in October (see Exhibit 30). Similarly, BPO revenues have also held
up better than expected with the feedback that BPOs continue to take up new space.
17 December 2020 14
Please see important disclosure information at the end of this report.Exhibit 29: Philippines real effective exchange rate
(2010=100) Philippines real effective exchange rate
120
110
100
90
80
70
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: BIS
Exhibit 30: Philippines overseas workers cash remittances %YoY
50 (%YoY)
Overseas workers cash remittances %YoY
40
30
20
10
0
-10
-20
-30
-40
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: CEIC Data, BSP
Meanwhile it is worth noting, in the context of the anticipated cyclical rebound in 2021, that the Philippines
had enjoyed an already extended eight-year-long investment cycle and related credit cycle prior to the
pandemic; though investment momentum has slowed in recent quarters. The annualised gross fixed capital
formation to GDP ratio has fallen from a 35-year high of 27.4% in 1Q19 to 23.1% in 3Q20 (see Exhibit 31).
As for credit growth, total banking system loan growth was only 0.8% YoY in October, down from 10.8% YoY
in March (see Exhibit 32). Still there remains room for credit expansion since the gross loan-to-deposit ratio
of the banking system is only 74%, though up from 63% in late 2013. Meanwhile, inflation remains, for now at
least, within the central bank’s target range of 2-4%. Headline CPI inflation was 3.3% YoY in November while
core CPI inflation was 3.2% YoY (see Exhibit 33).
17 December 2020 15
Please see important disclosure information at the end of this report.Exhibit 31: Philippines annualised gross fixed capital formation as % of nominal GDP
28 (%) Annualised gross fixed capital formation as % of nominal GDP
26
24
22
20
18
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: CEIC Data
Exhibit 32: Philippines banking system loan growth
20 (%YoY)
Philippines banking system loan growth
15
10
5
0
Aug-18
Aug-19
Aug-20
May-18
Oct-18
May-19
Oct-19
May-20
Oct-20
Jun-18
Nov-18
Jun-19
Nov-19
Jun-20
Sep-18
Sep-19
Sep-20
Mar-18
Jul-18
Mar-19
Jul-19
Mar-20
Jul-20
Apr-18
Apr-19
Apr-20
Jan-18
Feb-18
Dec-18
Jan-19
Feb-19
Dec-19
Jan-20
Feb-20
Source: BSP
Exhibit 33: Philippines CPI inflation and BSP policy rate
12 (%) BSP key overnight RRP rate Core CPI inflation CPI inflation
10
8
6
4
2
0
(2)
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: CEIC Data, BSP
17 December 2020 16
Please see important disclosure information at the end of this report.Analyst Certification:
I, Christopher Wood, certify that all of the views expressed in this research report accurately reflect my personal views about the
subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this research report.
Registration of non-US analysts: Christopher Wood is employed by Jefferies Hong Kong Limited, a non-US affiliate of Jefferies LLC
and is not registered/qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC,
a FINRA member firm, and therefore may not be subject to the FINRA Rule 2241 and restrictions on communications with a subject
company, public appearances and trading securities held by a research analyst.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in
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seek to update our research as appropriate, but various regulations may prevent us from doing so. Aside from certain industry
reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's
judgement.
Investment Recommendation Record
(Article 3(1)e and Article 7 of MAR)
Recommendation Published December 17, 2020 , 09:05 ET.
Recommendation Distributed December 17, 2020 , 09:05 ET.
Explanation of Jefferies Ratings
Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month
period.
Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within
a 12-month period.
Underperform - Describes securities that we expect to provide a total return (price appreciation plus yield) of minus 10% or less
within a 12-month period.
The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below
$10 is 20% or more within a 12-month period as these companies are typically more volatile than the overall stock market. For Hold
rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is
plus or minus 20% within a 12-month period. For Underperform rated securities with an average security price consistently below
$10, the expected total return (price appreciation plus yield) is minus 20% or less within a 12-month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable
regulations and/or Jefferies policies.
CS - Coverage Suspended. Jefferies has suspended coverage of this company.
NC - Not covered. Jefferies does not cover this company.
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expected total return over the next 12 months. The price targets are based on several methodologies, which may include, but are
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free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF, P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/
average group P/E, sum of the parts, net asset value, dividend returns, and return on equity (ROE) over the next 12 months.
Jefferies Franchise Picks
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Franchise Picks will include only Buy rated stocks and the number can vary depending on analyst recommendations for inclusion.
17Stocks will be added as new opportunities arise and removed when the reason for inclusion changes, the stock has met its desired
return, if it is no longer rated Buy and/or if it triggers a stop loss. Stocks having 120 day volatility in the bottom quartile of S&P
stocks will continue to have a 15% stop loss, and the remainder will have a 20% stop. Franchise Picks are not intended to represent
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style such as growth or value.
Risks which may impede the achievement of our Price Target
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Distribution of Ratings
Distribution of Ratings
IB Serv./Past12 Mos. JIL Mkt Serv./Past12 Mos.
Count Percent Count Percent Count Percent
BUY 1530 58.06% 138 9.02% 14 0.92%
HOLD 970 36.81% 25 2.58% 6 0.62%
UNDERPERFORM 135 5.12% 2 1.48% 1 0.74%
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