Philippine Markets Newsletter

MONDAY MACRO: This ratio’s continued decline not only implies delayed capex investments, but also delayed economic growth

July 26, 2021

News of the Delta variant hitting Philippine shores has sent the Philippine stock market into a panic. If the situation worsens, it could delay the recovery plans of companies.

Regardless, this chart shows that management has been and will likely continue to be pessimistic about near-term growth. However, it’s also indicating that the recovery, when it does come, might even bounce larger as a result.

Philippine Markets Daily:
The Monday Macro Report
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Last week, we discussed how the Philippines’ capacity utilization rate has remained subdued, despite improvements in other macroeconomic indicators.

Relatively low capacity utilization was partly because management teams have continued investing in their businesses, even though these businesses are not yet operating near full capacity.

However, because such low levels were caused by quarantine restrictions and not due to the regular business cycle, it is highly likely we’ll see a huge rebound once said restrictions are lifted.

To further understand the impact of returning to normal business operations on capacity utilization, we also need to consider the age of Philippine corporate assets. We can do that by taking a look at the Net to Gross PP&E ratio.

Property, Plant and Equipment (PP&E) are long-term assets a company needs to operate and generate revenue. These assets typically last for several years and even decades.

The timing of when management invests in PP&E can be a signal of what they think about the company’s growth. As such, a rising Net to Gross PP&E ratio indicates that management teams are replacing old assets, since they are seeing a lot of growth opportunities.

Meanwhile, a declining Net to Gross PP&E implies that management teams are letting assets age and are deferring capex investments, since there is too much risk in the market.

Looking at the past 20 years, the Net to Gross PP&E of Philippine corporations was at its historical low in 2009, driven by the market volatility induced by the global financial crisis.

Soon after, as economic growth became robust and more consistent, Philippine corporates gained confidence to invest heavily in new assets. The Net to Gross PP&E ratio was on a general upward trend over this period, from 52% in Q1 2010 to 60% levels in Q1 2018.

Since then, however, with the U.S.-China trade war and then COVID-19, the Net to Gross PP&E ratio has been on a general decline, indicating that management teams are deferring the majority of their capex investments.

While investment spending briefly rose in Q1-Q2 2020, it was mostly driven by companies quickly building their e-commerce capabilities and not out of any material change in sentiment.

Overall, management teams are currently letting their assets age, spending minimally on maintenance capex. As a result, the Net to Gross PP&E ratio will likely decline further in the near term, according to its current trend.

That said, it must be taken into consideration that while management teams are focused on conserving capex right now, there will come a time when companies will be forced to invest in order to keep production from breaking down.

As the Net to Gross PP&E ratio sinks lower each quarter, the likelihood of an extensive capex spend becomes greater. For investors, this may raise the ceiling of what the stock market can reach as companies finally spend on growth.

About the Philippine Market Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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