Tempest in a teapot at the PSE

BY BEN KRITZ, TMT, Manila Times, Apr 22, 2018

THE country’s benchmark Philippine Stock Exchange index (PSEi) has attracted more than its usual share of media attention of late for all the wrong reasons. Except for Venezuela, which is experiencing a self-inflicted economic disaster of almost ludicrous proportions, no other stock market index in the world has performed as poorly in the past year as the PSEi.

The numbers are indeed sobering at first blush. The PSEi has declined by about 10 percent so far in 2018, and as of Friday’s close, has only gained about 2.25 percent over a one-year period. In a three-month period, the market’s value has shrunk by about $30 billion; provoked, most analysts have suggested, by a steady sell-off of shares by foreign investors. Foreign investors have been net sellers for almost 12 straight weeks; about $860 million has been taken out of the market since the PSEi hit a record high of 9,058.62 on January 29. Thursday was a particularly rough trading day – at one point the market hit its lowest point for the year, before rallying a bit to close down 110 points or 1.42 percent from Wednesday.

What makes the numbers seem even more alarming is that the reasons given for the PSEi’s extended run of lackluster performance are largely based on local factors. Analysts have become openly critical of the BSP’s reluctance to raise its benchmark interest rates, and most share the opinion that the central bank has waited too long; the prospects of higher interest rates in the US are making US securities a more attractive option right now than Philippine equities, hence the retreat of foreign investors. Likewise, inflation running higher than expectations and a tightening job market are discouraging factors; both have a potentially negative impact on Philippine companies’ profits, which leads to the conclusion that many local stocks are overvalued.

The numbers, however, are only useful for drawing conclusions if they are viewed in a complete context. The PSEi’s market valuation (as of the end of March) is about $252 billion, or roughly 92.6 percent of gross domestic product. That ratio broadly indicates the local market as a whole is actually slightly undervalued; for comparison, the market cap-to-GDP ratio of the New York Stock Exchange (NYSE) is about 117.2 percent, and in Hong Kong, which has approximately the same GDP as the Philippines, the ratio is a mind-boggling 1,237 percent.

The impact of foreign investors seems to be grossly overstated as well. The $30 billion three-month decline in market value is a drop of about 11 percent, but foreign money only accounts for about 2.9 percent of that, or about 0.26 percent of the PSEi’s total value. Over the past five years, trading activity attributable to foreign buyers and sellers has ranged between 10 and 15 percent of the market’s total activity, according to our own research; therefore, the most rational conclusion from the available data, despite alarming reports, is that most foreign investors are in fact not pulling their money out of the PSEi. The market may not be attracting many new foreign investors, but most of the ones already here seem to be intent on staying.

Business media and even governments often like to portray stock markets as avatars for entire national economies, but they tend to overestimate their significance in this respect; at best, stock markets only provide a broadly generalized snapshot of economic conditions. Market performance reflects the reactions of investors to economic conditions in the context of how those conditions might impact the issues they are invested in, and the reactions of investors to other investors’ reactions to economic or corporate developments. It is essentially a closed system, as far as the rest of the economy is concerned; after all, the PSEi is only made up of 30 issuing companies. Very large companies, certainly, but in terms of driving the entire economy, not nearly as influential as the vast mass of small and medium enterprises that make up about 97 percent of all Philippine businesses.

Even if it is the world’s worst-performing stock exchange by the numbers, the PSEi’s results do not in any sense resemble a crisis. A decline of 10 percent over a three-month period is still relatively mild; likewise, even Thursday’s “bad day” was only noteworthy because the PSEi is generally remarkably consistent, and exceeds a 1 percent change up or down only occasionally. In terms of significance to the wider economy, Thursday’s results meant absolutely nothing at all, and the worst that can be said about the longer period of market cooling is that it suggests economic sentiment is slightly less optimistic than it was toward the end of last year. “Slightly less optimistic” is only cause for worry if it deteriorates into actual pessimism, but barring an unforeseen economic shock, that seems unlikely to happen.

ben.kritz@manilatimes.net