A Danish investment advisor expects the Philippine economy to post one of the fastest growths in the world next year, but warns about the risks of overheating, given the massive stimulus spending that the government plans under the ‘Build, Build, Build’ infrastructure program, the weak peso, the low interest rates and the rising inflation.
“What I am more worried about is that the Philippine economy could overheat, because there might be the tax reform in the first week of January. There is also the strong infrastructure spending next year, The Philippine peso is relatively week, and that means continuous monetary easing,” says Peter Lundgreen, the founder and chief executive of Copenhagen-based Lundgreen’s Capital.
Lundgreen’s Capital is regulated by Danish financial authority ‘Finanstilsynet’ and has a license to offer individual investment advice and risk management consulting in the European Union. It also has an office in Fort Bonifacio, which Lundgreen visits three or four times a year, to monitor the situation in Asia, including China.
The company operates as a financial advisory company and offers services to corporations, individual wealth management, municipalities and organizations in Europe. Lundgreen has a 30-year experience in the German financial and banking industry and was the former head in the markets division at Danske Bank and head of multinational sales at Dresdner Kleinwort Wasser-stein. He speaks three languages: English, Danish and German.
“I decided to form my own company in December 2009. Financial market has always been my passion. I have never thought of doing anything else than being in the financial market. May main career is to advise very large European companies about financial risks,” says Lundgreen.
Lundgreen says he decided to establish an office in the Philippines to tap its talent in English communication and social media. “The reason is it is natural for me to be in Asia,” says Lundgreen, who also visits Hong Kong and Beijing often.
“Now I come here frequently. The Philippine economy is extremely interesting. It is natural to sort of explore and gather opinion about it,” says Lundgreen, who saw the continuous rise of skyscrapers in Fort Bonifacio over the past two and a half years. “In terms of economic growth, the Philippines is number one. It is always interesting to be here,” he says.
However, there are warning signs that should be heeded by the central bank, he says. “The financial market fears that the central bank will be too late in hiking rates. Right now, I sort of argue that the central bank [Bangko Sentral ng Pilipinas] is two hikes delayed by 25 basis points, each. They should clearly signal that in case of any sign of overheating, they are ready to hike immediately. I think they should state that very clearly,” Lundgreen, 50, says in an interview in Makati City.
The Philippine economy grew 6.9 percent year-on-year in the third quarter, the second fastest in the region after Vietnam. However, the peso is one of the poorest performing currencies in Asia this year, trading at an 11-year low, amid strong demand for imported capital equipment ahead of the expected infrastructure boom in the coming years.
Lundgreen, who is also an international speaker and resource person, says two interest rate hikes may be needed to reverse the trend of the sliding peso.
The International Monetary Fund also earlier warned that the “combination of high credit growth, buoyant private investment and fiscal expansion without tax reform could lead to overheating of the economy.”
Bangko Sentral Governor Nestor Espenilla Jr., however, said the current GDP growth was in line with the economy’s potential and that overheating could be avoided through high-quality investments. An economy is said to be overheating if the productive capacity is unable to keep up with increasing demand.
Lundgreen expects the Philippines to be the world champion in GDP growth in 2018, and says that its stock market has further room for growth. However, the country might be affected by the rising risks in the bond market.
“I have one global concern and it also affects the Philippine market. I see the biggest problem in the bond market. First of all, bond prices are really, really high,” he says.
“The very, very biggest fear I have for the financial markets right now is the rising risk of a bond selloff. The risk for it to happen has gone up over the past one or two months. So it is more likely that you will see a big selloff in the bond market that will set interest rates higher. That will shake the stock market as well,” says Lundgreen. “Again, this may not be the primary scenario yet, but the risk has gone up for it to happen.”
“Everybody will rush out of the door selling all the bonds. We are now advising people, as a first counter measure, to reduce their duration in the bond portfolio,” he says.
Lundgreen claims that inflation rates are higher than what are reported by authorities. “I argue that the inflation is higher than we think. That’s because inflation in a globalized world is different. Today, consumption consists of digital services that you have bought somewhere in the world. We have no influence on the price. We have difficulty measuring prices changes, increases and a lot of things. So your product consumption is looking different,” he says.
“There are loads of inflation components, and they all point to higher inflation. Inflation has gone up. We just don’t know it or we don’t see it,” he says.
Lundgreen believes that interest rates should be higher to counter the rising inflation rate. This would force bond prices to correct lower, he says. “The central banks are behind the curve in terms of hiking. They need to hike rates very fast. This is a global concern. The Philippine central bank is not the only central bank being behind in hiking rates. The European, Chinese central banks, the Fed in the US are behind in hiking rates as well,” he says.
“The Fed is in doubt about inflation. They don’t understand the inflation right now. The Fed is indecisive. Being indecisive increases the risk of the financial market being uncomfortable with the central bank. There is the risk that this indecisiveness line continues. This leads into an overheated bond market, because inflation is much higher than we expect. So we have a mismatch in the bond market. The biggest risk I have seen in the financial markets is actually overvalued bonds,” says Lundgreen.
Bond prices usually increase in an environment of low inflation and interest rates. Lundgreen says a failure to properly measure inflation now creates a problem in the bond market.
Amid these developments, Lundgreen advises investors to reduce the duration of their exposure in the bond market. “It is the first small adjustment. This is a change in my market view in the past six weeks. As a way of changing view and advisory, of course it can happen overnight. The risk has become bigger, because the bond market is still going up and interest rates are going lower. And that’s a problem. There is a clear mismatch between inflation and how the bond market is reacting,” says Lundgreen.