EUR and JPY weakness to outpace USD debasement

I actually expect the debasement of the EUR and Japanese Yen to outpace the USD debasement, so we can expect a relatively strong USD. All these currencies will of course be weak against the commodity currencies and emerging markets. See my article about the Fed and Asian property.

The interesting aspect is the impact on the commodity producing countries like Australia, Canada, South Africa, Chile, Brazil; as well as the emerging markets like China, Korea, Thailand, Indonesia and the Philippines.

We can expect these countries to be strong. It is interesting of course because the Fed and EU are blaming the Chinese for the strong Yuan; but partially the reason for the strong Yuan is that the US and European Central Bank (ECB) are debasing their currencies. True, the Chinese are funding the US deficits, and that has artificially raised the USD, but that is with the support of the US government.

We might well expect emerging markets to survive this currency crisis fine this time; largely I think because they can expect a lot of property investment by Western fund managers. Expect a property boom in Asia, particularly the Philippines, China, Vietnam and Thailand. Small Western players are better off in the Philippines because of favourable language (i.e. English), familiar legal system, generous visa rules, and good yields of 8% on high-end apartments.

So what about the commodity producing countries? Australia, NZ, Canada, Brazil and Argentina rely greatly on commodity exports. The problem of course is that mineral commodities do not price at parity with agricultural commodities. This is has to result in these countries sabotaging their currencies with debasement, or more likely we can expect the stronger foodstuff prices to continue. This development makes investment in countries like the Philippines more attractive, or other countries which might have cheaper agricultural land. I know the Philippines does have marginal land as cheap as PHP10-20/m2 (USD0.20/metre2), however you could probably do better elsewhere. Certain higher value crops like coffee are better in the Philippines. Nestle certainly produces a lot. Some of the mountain provinces are also suitable to growing more temperature foodstuffs. e.g. Baguio City is a food basket for the Philippines. It is one of the few cities with malls in the cool mountains...aside from Tagaytay, south of Manila. Anyway, the Philippines is a distraction from the currency strength that is gripping these commodity and emerging markets. So expect stronger commodities as the central banks debase currencies with more 'quantitative easing'.

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Andrew Sheldon www.sheldonthinks.com

The Yen set to fall against the Philippines peso

Whilst I am looking at exchange rate action, its noteworthy for Japanese people and Western expats living in Japan that they ought to consider buying property in the Philippines. Why? Well...the Yen is about to fall, so it would be a good idea to remit money before the currency collapses. Property yields in Japan are about 12-13% now, compared to 8% in the Philippines. The difference however is that Philippines population growth is 2% per annum, whilst Japan's is negative, and does little better than 1.5% in certain districts of the major cities.

The Philippines is attracting a lot of investment from Taiwan, China and Korea in tourism, and also a lot of business from US, Australian and NZ call centres. Aside from that, it also has a healthy exposure to expat remittances and domestic commodity production. In recent years the Philippines has been growing at 7-8%, and there is no reason why that will not be sustained.

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Andrew Sheldon www.sheldonthinks.com

Philippines Peso - down on reform uncertainty

The Philippines peso is not one of the easist currencies to trade, but having visited the country in recent weeks, the country strikes me as an emerging good story. There are a number of dynamics shaping up to propel this country:

1. Constitutional crisis: The Arroyo government was close to impeachment in recent weeks, and though it looks like she will have a reprieve, a strong consensus emerged for reform. The Philippines is considered the 2nd most conrrupt country after Indonesia in Asia.
2. New cabinet: During the crisis, Arroyo moved to appoint several ministers who were well received by the Makati Business Club. eg. New finance minister, etc
3. High oil prices: The Philippines is strongly dependent on imported oil. This dependence has eroded government activity.
4. Expat income: The Philippines has the good fortune of having some 5mil expats working overseas, mostly in the USA, Japan and the Middle East. In times of crisis these Filipinos repatriate more funds to the Philippines.
5. Terrorism: The Philippines comprises 3 island groups. The southern island group of Mindanao/Sulu hosts a large number of Muslims, some of whom engender extremist views - the Abu Sayef - and resort to kidnap and ransom demands, assasinations and bombings of key infrastructure. Their activities have impacted on investment in the Philippines and the southern islands in particular.
6. Values: The Philippines has embraced the worst elements of western thinking - populist democracy, Catholicism and the hypocrisy that accompanies such subjective values. This aspect of the Philippines remains the most enduring and the most scary. Chile proved that it can be done - though it did not have the same democratic foundation given that Pinochet maintained control of the military.
7. Investment potential: The Philippines remains (along with Indonesia) the poor bed-fellow in Asia. There are 3 sectors of the Philippines economy that hold particular promise:

a. Mining: The Philippines is very rich, so is likely to benefit from a future mining boom. It will be greatly advantaged by expat miners returning home.

b. Tourism: More than most countries in Asia, the Philippines offers an attractive archipelago for developing tourist resorts for Asians. Part of the appeal is the allure of the Filipino, though improvements in diet, infrastructure, service, security and safety are needed.

c. Property: There are currently significant constraints on foreign investment in property in the Philippines. Foreigners are for pure investment purposes are only allowed to invest in condominiums starting from $US40,000.

In recent weeks the Peso has fallen to P42 against the $A and $56 against the $US. Uncertainty over the constitutional process and higher oil prices and the collapse of Asian exports can be expected to see the peso trade lower in future, but that will present an attractive buy opportunity.

- Andrew Sheldon www.sheldonthinks.com