Aside from the pandemic, Filipinos have been dealing with the country’s rising inflation rate. The Bangko Sentral ng Pilipinas (BSP) forecasts 3.2 percent inflation in February this year, primarily due to price increases in oil, rice, and some meat products.
However, given recent geopolitical developments, the global wheat, oil, and energy prices are likely to soar further, given the expectations of higher demand and tighter supply in the global markets. This will result in a significant spike in inflation, which will exceed the BSP target as early as the second quarter.
Inflation has surpassed COVID-19 as the biggest threat to markets for many businesses, and while almost everyone loses, there are a few winners. Equity prices have been volatile in early 2022, some sectors may be able to absorb the impact of inflation better, while others may even be poised to benefit.
Energy sector
Energy is recession-proof since it is a necessity. Demand for energy tends to be price inelastic since modern economies cannot function without heating and power. Also, as energy is essential, it serves as the basis for the cost of other goods and services such as food and transportation. This has a direct impact on other goods and services since the price of all economic activities includes energy as an input cost.
The nearly 25% increase in crude oil prices year to date is feeding higher levels of fuel inflation across developed and emerging markets. This increase has a high sensitivity in the energy sector. According to the Philippine Independent Power Producers Association (PIPPA), preliminary estimates indicate that the price of fuel may drive rates to P9/kWh after the price of coal (on March 3) reached $446 per ton.
Utilities are generally regarded as basic necessities as we continue to require all of them (think electricity, heat, gas, etc.) regardless of the inflationary environment. Despite price increases, energy companies continue to be profitable as input costs are simply passed on to consumers.
Mining Sector
The mining industry has not been exempted from the effects of inflation, and precious metals are examples of where the impact can be seen. Mining could be a bright spot in the economy as global inflation continues to rise in the 2nd quarter and beyond. Mined commodities such as gold, tin, copper, and other metals and ores are typically seen as a hedge against inflation as their values have tended to rise in step with inflation.
According to data from the Mines and Geosciences Bureau (MGB), the country’s mining sector contributed approximately US$4.38 billion to the economy in 2019 through the exports of metallic, non-metallic minerals, and mineral products, with Japan, Australia, Canada, and China as the major buyers. In the same year, the total estimated production value for metallic minerals was P130.73 billion, up by 7.03% or P8.59 billion compared to 2018’s P122.14 billion. Around P107.4 billion was estimated to be Gross Value Added (excluding crude oil) in mining at recorded prices.
Furthermore, as inflation rises, the value of cash falls, while on the other hand, gold is able to retain its value. Rising global inflation pushes assets with limited supply, such as gold, higher up on investors’ buy lists.
According to economist Andrew J. Masigan, the Philippines’ gold deposits are among the world’s largest, with reserves estimated at 101.6 million metric tons. Iron ore reserves are estimated to be 298 million metric tons. Among non-metallic minerals, limestone reserves are approximately 19.5 billion tons while marble reserves are at 14.5 billion tons. The Philippines leads the world in chromite resources as well.
The mining companies are well-positioned in the current cycle to pass on higher industrial metal prices to their customers. Their profits are directly related to the price at which they can sell the metals they extract. This means, when prices are high, miners will strive to ramp up production to profit from the additional volume.
Real Estate Sector
During periods of high inflation, the real estate sector provides several advantages, particularly in income-generating assets. Property owners will see appreciation as property values keep pace with inflation. As fewer real estate development projects are undertaken as a result of rising labor, material, machinery, and other costs, property supply falls, resulting in further price increases in occupancy rates. The value of an existing property might also increase, given the rising cost of materials and labor to build a comparable structure. In general, however, the real property serves as an excellent store of value that protects against inflation. Whereas liquidity may be an issue during recessions, those that can hold real property through recessions typically come out of it with higher net worth.
Real-estate investment trusts (REITs) may also help to mitigate the impact of rising inflation. They outperformed inflation 67% of the time and posted an average real return of 4.7%. Equity REITs own real-estate assets and can provide a partial inflation hedge by passing on price increases in rental contracts and property prices.
In contrast, mortgage REITs, which invest in mortgages, are among the worst-performing sectors. The same as bonds, their coupon payments generally become less valuable as inflation rises, causing yields to rise and prices to fall to compensate.
Real estate investing has advantages and disadvantages. As compared to purchasing shares of a stock, the transaction costs are significantly higher when acquiring real estate property. Investing in a property requires management and maintenance, and these costs can add up rapidly.
Healthcare Sector
Healthcare is yet another sector that tends to be recession-proof as patients will spend on healthcare regardless of prevailing economic situations.
According to Mark Hulbert’s research in which he compared 49 industry groups since 1926, the winning industry is healthcare. Except for dispensable procedures, healthcare has inelastic demand which means that price changes have a limited effect on demand levels. People and governments protect their healthcare budgets while slashing other non-essential spending, that is why it outperforms other sectors during inflationary periods.
With several uncertainties in the various industries this year, some experts believe that positive change in the healthcare sector may be one constant to look forward to this year. According to Deloitte report, the ongoing pandemic conditions, as well as advances in science, technology, and analytics, are the main catalysts for the industry’s “clinical, financial, and operational transformation” in 2022.
One component of this change is the increased adoption of global health care digital experience platforms, a market that is expected to reach $2.3 billion by 2028, representing a compound annual growth rate (CAGR) of 12.9 percent from 2021 to 2028. These platforms are essentially designed to improve connectivity between healthcare providers and patients while assisting in the reduction of costs across the industry at the same time.
The pandemic accelerated provider improvements in digital experiences, allowing them to maintain relationships with patients while reaching new segments despite the challenge of COVID-19. We anticipate that these digital investments in the patient relationship will boost customer access to care, as well as utilization and medical cost trends in 2022.
Written by: Mary Grace Ladringan and Roque Sorioso Jr.
Aviso Valuation and Advisory Corp. is a real estate consultancy firm that offers valuation and business advisory services compliant to international standards such as the International Valuation Standards (IVS) and International Financial Reporting Standards (IFRS). To assure that we only produce high-quality deliverables, as needed, we do tasks beyond the usual appraisal process like verifying pertinent property documents (i.e. land titles, tax declarations, etc.) with the appropriate government agencies for due diligence purposes prior to the acquisition of the properties.
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References:
https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP597.pdf
https://www.bworldonline.com/philippine-mining-a-contributor-to-economic-recovery/
https://www.hl.co.uk/news/articles/rising-commodity-prices-which-miners-could-benefit-most
https://investingnews.com/high-inflation-affecting-prices-companies/
https://www.bworldonline.com/philippine-mining-a-contributor-to-economic-recovery/
https://investingnews.com/high-inflation-affecting-prices-companies/
https://www.hl.co.uk/news/articles/rising-commodity-prices-which-miners-could-benefit-most
