Goldman Sachs too bullish on SM Group outlook

Like an Instagram filter that brightens an otherwise hazy photograph, the lens through which Goldman Sachs Group, Inc. is looking at Philippine conglomerates might be a tad too radiant.

The investment bank published a research report Monday calling on investors to show some love to the nation's largest business dynasties, which it said are poised to benefit from rising consumer spending in the fastgrowing emerging market.

Goldman showered the highest praise on SM Investments Corp., a retail, banking and property conglomerate founded by billionaire Henry Sy, the Philippines' richest man. Goldman reckons the company's shares could rise by 18 percent over the next 12 months as shoppers frequent malls and grocery stores more often.

SM Investments is a proxy for the Philippines economy, where consumption is the largest driver, says Goldman, echoing the corporate line by Frederic Dy Buncio, who became president of SM Investments in April.

It also rated developer Ayala Corp. a new neutral, along with GT Capital Holdings, Inc., an investment group that provides banking, automotive, real estate and insurance services. Rising incomes will also help open up new markets for conglomerates, the investment bank said.

It's true the Philippines has been purring along nicely in recent years, with expected economic growth this year of 6.5 percent outpacing neighbors including Singapore, Thailand, Malaysia and even Vietnam. With the percentage of car owners and the penetration of modern grocery stores still low, consumption metrics suggest the country is ripe for further investment.

But what Goldman skipped over is that for consumer growth to be sustainable, it must be coupled by investment in infrastructure, such as airports, highways and power systems. And while President Rodrigo Duterte pledged to raise spending and increase foreign direct investment before he was elected last year, so far that hasn't amounted to much more than a campaign promise.

Take the planned upgrade of the main Ninoy Aquino International Airport in Manila. As my colleague Andy Mukherjee recently pointed out, the $1.5billion public-private partnership has been put on hold, leaving investors treading water.

Ditto for projects like new power plants and renewable energy installations meant to lower the cost of electricity, which comes with a 60 percent higher price tag for households in the Philippines versus Thailand. Indeed, only a handful of the 50 planned ventures under the public-private partnership program have been completed and are actually operating.

Meanwhile, the international headlines coming out of the Philippines are alarming, centered on terrorism, human-rights abuses and Duterte's expletive-laden insults against the Pope, the US, and the European Union. It's gotten so bad that the country's official tourism website declares that the "Philippines remains a safe and fun destination for all tourists." It also reminds visitors that airports are open.

Declaring martial law on the country's second-largest island doesn't bode well either for tourism, which made up 8.6 percent of the Philippines' GDP last year. So far, visits to the Philippines are still up from last year, but growth has slowed, data from the Philippine Statistics Authority show.

And although Duterte might have found a friend in China, conglomerates like SM Investments may find they're diving into Asia's biggest economy just as consumer spending there slows.

Goldman's report wasn't wrong about the Philippines' economic story. If it comes to fruition, it could well propel the country's largest conglomerates to a higher level of growth. But it has also revealed just one part of a more complex picture.

(This column does not necessarily reflect the opinion of Bloomberg LP and its owners.)