Philippine Strategy:Hitting the ground running

Event

The PCOMP has surged by 8% since Election Day, as it applauded theRodrigo Duterte presidential victory, the sheer speed of the announcement ofthe outcome, and the avoidance of unwanted extra political instability that adisputed election result would have brought.

In our view, the market is pricing in a good presidency having tangibleexecution advantages. As a result, expectations have been increased in termsof both economic outlook and corporate fundamentals, and a new presidencythat possesses a strong mandate.

Impact

An unprecedented mandate provides the precious political capital forimproved government execution. Presumptive president Duterte’s win wasas dominating as could have been imaginable for the Philippine politicalscene. In addition to matching the raw numbers from Noynoy Aquino’s win in2010, the field of candidates this time around was tougher and better qualifiedthan the field six years ago. This is an important factor that means Duterteshould have all the needed political capital to execute his platform ofgovernance in a very effective manner.

Eight point agenda is a solid start, with property sector benefitting themost. We find the eight-point economic agenda released by Duterte to be avery good start that points to decent execution. However this needs to havestrong follow-through, which over the next few weeks prior to inauguration onJune 30 should be spearheaded by the make-up of his government and thecabinet. Our assessment of the eight point agenda shows that the propertysector benefits the most, followed by utilities / infrastructure and banks.Stocks that figure quite prominently are led by ALI followed by MBT, SMPH.

The blue-sky scenario and the realistic outcome. We consider a blue-skyscenario to be the following under Duterte: 1) reducing crime to a point whereeconomic development receives a noticeable boost; 2) fulfilling the entireeight-point economic agenda to the letter; and 3) being successful andunifying the country, including supporters of losing candidates. However wethink a more likely outcome could be similar to the administration of PresidentFidel Ramos in 1992-1998, which made clear gains in execution and reform.

Considerable risks remain. We believe considerable risks remain present ina Duterte presidency. Failure in execution in a platform that appears wellthought-out but difficult to implement is a possibility. We also think that beingunable to finish his term is a considerable risk: whether on health,impeachment, or non-constitutional means of removal from office. Finally,there is the possibility that the fears his detractors expressed during theelections may be proven correct.

Outlook

Overweight Philippines, but revise our preferences to suit the upcomingDuterte administration. This means an increase in weightings of the propertyand utilities / infra sectors, which are reflected in our revised model portfolio.We have added ALI, CEB, BDO, and RLC to our list of top picks, joiningholdovers MEG, MBT, PGOLD, AC, MPI and SMPH.