VIEWS FROM THE PEAK: The butterfly effect

By Joey Cipres, AP Securities research analyst 

The butterfly effect refers to the concept that a small and seemingly unrelated action can have an outsized influence on the other side of the world, evoking the image that a butterfly flapping its wings can alter the winds just enough to cause a typhoon elsewhere. 

There is no scientific basis for this, of course, but the butterfly effect speaks to the deeper interconnectedness of things, especially in this globalized world that we live in. 

Our listed companies are not spared from the metaphorical flapping of a butterfly’s wings. 

We all know how Typhoon Trami (locally named Kristine) recently hit our country, causing widespread flooding and causing damage that is estimated at a whopping P2.2 billion. After Trami left our shores, it then went toward Vietnam and made landfall in Da Nang last Sunday.

Joey Cipres 
AP Securities research analyst 

We would typically deduce that the effect of the typhoon in the Philippines would only be to the extent of the direct damage it has caused, namely the destruction of 27,000 homes, damaging power and telecommunications infrastructure, roads and bridges, and hectares of farmlands, impacting crops, livestock, poultry, fisheries, and more. 

However, this is not the case given the current economic interconnectedness in the world. When Trami made landfall in Vietnam, it came just at the start of the coffee harvesting season, which typically runs from October to April. 

The heavy rains and strong winds caused by the typhoon in Vietnam are expected to result in lower yields in the country that produces 38.7 percent of the global supply of robusta coffee.

This translates into higher prices for this particular coffee bean (which is already up by 96.3 percent year-on-year), which in turn could affect the margins of some listed Philippine companies that use robusta coffee in their products, even if they do not source it directly from Vietnam.

"[T]his is a clear example of why smart investors should not focus solely on domestic developments and be aware of events on the other side of the world, no matter how small, that can potentially affect their investments."
- Joey Cipres

One company that comes to mind is Jollibee Foods Corp. (JFC), given their utilization of robusta beans for their Highlands Coffee chain, which also operates primarily in Vietnam. 

We note that this brand contributed roughly 7 percent of JFC’s Ebitda (earnings before interest, taxes, depreciation and amortization) in the first half of this year, so the impact on earnings is meaningful. 

Another company that could feel the effects of higher coffee bean prices is Universal Robina Corp.  (URC), as the company primarily uses robusta beans in the production of their coffee products such as Great Taste, Blend45, and Café Puro. 

While the company does not provide granular data on the contribution per category under the broader Branded Consumer Foods (BCF) segment, we can deduce that this division represents a notable portion of the revenues as their brands capture a significant market share of 17.3 percent for ready-to-drink coffee, 20.2 percent for instant coffee, and 16.5 percent for coffee mixes.

To sum it all up, this is a clear example of why smart investors should not focus solely on domestic developments and be aware of events on the other side of the world, no matter how small, that can potentially affect their investments. 

Even though developments like this may not make much of a difference in the long run, we find that thought exercises like this help sharpen our analytical skills and aid in forming sound conclusions, specifically when it comes to making investment decisions. 

While the market seems like a scary place given the extensive amount of information that we need to digest in order to achieve better returns on our portfolios, we exercise the glass half full idea that the ease of access to the information that we enjoy right now should be thought of as an opportunity to become better investors.

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