Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But perceptions shift late in the cycle. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold—Doug Noland
In this issue
Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks
I. PSEi 30’s Early Start: A Strong Tape — On the Surface
II. Headline Strength vs. Structural Fragility
III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance
IV. Breadth and Liquidity: Gains with Caveats
V. Confidence Policy and Market Structure Risk
VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities
VII. Conclusion: When Index Strength Outruns Market Health
Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks
Index strength masks concentration, policy engineering, and rising geopolitical fragility
I. PSEi 30’s Early Start: A Strong Tape — On the Surface
The PSEi 30 closed the week up 2.26%, pushing its 2‑month return to 9.22%—one of the strongest early-year performances in recent years.
Figure 1
The Philippine market appears to be benefiting from abundant global liquidity and rotational flows. Last year’s Asian laggards—Thailand and the Philippines—are now among the top YTD performers, alongside continued momentum in high flyers such as South Korea, Taiwan, Japan, and Singapore. (Figure 1, upper window)
Yet the strength has emerged despite an “unexpected” Q4 GDP slowdown to 3%.
In February alone, the PSEi 30 posted a 4.46% MoM and 10.22% YoY gain. (Figure 1, lower table)
The divergence between slowing output and rising asset prices was not organic—it was liquidity-driven, fueled by foreign inflows and heavy concentration in select index names.
The tape is strong. The base is narrow.
II. Headline Strength vs. Structural Fragility
Cap-weighted indices increasingly function less as barometers of broad market health and more as mirrors of heavyweight concentration.
This is not unique to the Philippines. The MSCI World Index, for example, is heavily skewed toward the United States and further concentrated in mega-cap technology firms.
But scale matters.
In deep, liquid markets, concentration often reflects earnings dominance, structural passive flows, and sustained institutional participation. While representation may be distorted, price discovery remains broadly competitive.
Figure 2
By contrast, in thinner markets, rising concentration is compounded by shallow turnover and limited participation. In such conditions, late-session or post-recess “afternoon delight” flows, along with pre-close (5-minute float) coordinated pump-dumps targeting heavyweight stocks, can exert an outsized influence on index levels. (Figure 2, topmost pane)
The outcome is not simply greater concentration, but structural fragility — where headline index strength may owe more to liquidity conditions, market microstructure, and political dynamics than to broad-based economic vitality.
Index gains, therefore, should not automatically be interpreted as evidence of systemic health.
In shallow markets especially, strength at the top can coexist with weakness underneath.
III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance
Performance has become increasingly concentrated.
International Container Terminal Services, Inc. (ICTSI) now dominates index and sector dynamics:
- Services index: +10.3% MoM, +45.74% YoY, +19.82% YTD (February 2026)
- ICTSI share of services sector volume: 52.35%
- Services sector share of main board value: ~35%
ICTSI’s weight in the Services Index rose from 55.31% in January to a record 56.4% in February. (Figure 2, middle diagram)
Its share of main board turnover increased from 15.32% to an all-time high of 18.48%, approaching the 19.8% peak recorded by PLUS during its July melt-up.
Last February, foreign fund flows accounted for 16% of ICTSI’s total turnover—the highest level since at least October 2025 (Figure 2, lowest graph)
Figure 3
Within the PSEi 30, ICTSI’s weight surged to a record 19.3% on February 25, closing the week at 18.9%, as of February 26th. (Figure 3, topmost image)
The top five heavyweights now account for 51.51% of the entire index or five issues comprise more than half of the PSEi 30.
This means: A 1% move in ICTSI contributes nearly as much to index performance as several smaller constituents combined.
This is mechanical leverage embedded in construction.
That is not breadth — it is structural leverage.
February’s advance saw 20 issues rise, 9 decline, and 1 unchanged, with an average gain of 3.92% — slightly below the 4.46% free-float index gain, illustrating the impact of cap weighting. (Figure 3, middle graph)
Year-to-date, ICTSI’s +26.23% outperformance has amplified this divergence. Among the top ten stocks (71% of index weight), gains were supported by AC, JFC, MBT, and MER, yet the average gain of the 19 advancing issues was 6.8% — still below the 9.22% index gain. (Figure 3, lowest chart)
That February and YTD gap is weighting. This is not just concentration.
It is weight-amplified performance dispersion.
IV. Breadth and Liquidity: Gains with Caveats
Figure 4
The PSE’s market breadth improved modestly in February, extending January’s gains and helping buoy sentiment for the first time since 2019. (Figure 4, topmost diagram)
Main board volume rose 16%, marking its second consecutive year of improvement. However, aggregate figures mask internal concentration, with ICTSI absorbing a substantial portion of incremental flows. (Figure 4, middle visual)
Improvements in breadth have not been proportionately reflected in volume distribution or broader technical structures.
V. Confidence Policy and Market Structure Risk
The PSEi bottomed in mid-November 2025 — shortly before the appointment of a prominent tycoon to the Finance Department. (Figure 4, lowest image)
Prior to this, a three-way energy deal involving SMC, MER, and AEV was announced.
Subsequently:
- Real Property Taxes (RPTs) were suspended for energy firms.
- GEA-ALL subsidies to renewables were shifted to consumers.
- Banking system net claims on government surged to record highs in December.
These are not neutral developments.
Figure 5
Expanded fiscal financing through the banking system injects liquidity that can spill into asset markets. (Figure 5, topmost window)
Support measures for key corporates improve earnings visibility and collateral value.
Infrastructure and energy subsidies reinforce balance sheet narratives for dominant index constituents.
San Miguel shares initially led the PSEi 30 higher in Q4 2025 but have since given up more than half of their gains. (Figure 5, middle graph)
MER and AEV shares joined the shindig along with the PSEi 30. (Figure 5, lowest chart)
In this context, confidence appears to be a central component of policy transmission—whether through the Bangko Sentral ng Pilipinas or the Department of Finance—aimed at stabilizing sentiment, supporting collateral values, and encouraging distributional effects into GDP. However, confidence-driven liquidity does not eliminate underlying structural fragility, particularly in a concentrated and thin market environment.
It merely elevates sensitivity to shocks.
VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities
The renewed outbreak of conflict in the Middle East involving the United States, Israel, and Iran introduces immediate geopolitical risk premia into global markets, with energy serving as the primary transmission channel.
However, the duration of the conflict matters significantly. A short-lived escalation may generate temporary price spikes, while a prolonged confrontation would embed a more persistent risk premium across commodities and financial assets.
Globally, any credible threat to Iranian production—or worse, disruption of the Strait of Hormuz—could trigger sharp upside volatility in oil prices. Roughly 20% of the global oil supply passes through the Strait of Hormuz. Even without a physical blockade, elevated risk alone tightens supply expectations and lifts futures curves.
Higher crude prices would feed into transportation, manufacturing, and electricity costs, raising the probability of a renewed inflation impulse.
Central banks could face a stagflationary dilemma: tolerate higher inflation or tighten policy into weakening growth.
Financial markets would likely reflect classic risk-off dynamics—strength in oil and gold, alongside pressure on broad equities, particularly in energy-importing economies.
For the Philippines, these global effects would be amplified by structural vulnerabilities. As a net oil importer, higher crude prices would directly raise domestic fuel, power, and logistics costs. According to the World Bank, Philippines net imports of energy use amounts to 54% as of 2022.
This would place upward pressure on CPI and household expenses, further squeezing consumption—the (savings-investment gap) backbone of Philippine GDP.
It would also increase pressure on debt-financed deficit spending, particularly as fiscal financing partly relies on foreign portfolio and external savings to bridge funding gaps. Higher global rates and a weaker peso could raise borrowing costs and heighten refinancing risks.
A widening trade deficit driven by higher import bills would likely weaken the peso, reinforcing imported inflation pressures.
This dynamic complicates policy for the Bangko Sentral ng Pilipinas. Any resurgence in inflation expectations could delay easing or necessitate tighter financial conditions, raising borrowing costs for property, consumer credit, leveraged corporates, and public finance. The resulting environment carries stagflationary characteristics: slower growth combined with sticky prices, increasing duration risk, interest-rate volatility, and credit risk across the financial system and the broader economy.
As such, equity implications would be uneven—mostly adverse.
Figure 6
Energy and mining shares may respond positively to higher commodity prices, particularly upstream oil and gas producers and exploration firms that directly benefit from rising metal and crude prices. (Figure 6, upper chart)
The Philippine mining and oil index has already been outperforming and diverging from the PSEi 30, suggesting early sectoral rotation toward commodity-linked exposures. Escalation in the Middle East would likely reinforce this divergence by sustaining risk premia in the gold and energy markets. (Figure 6, lower graph)
In contrast, downstream refiners, distributors, and power utilities—especially those operating under regulated tariffs or fixed contracts—may face margin compression as input costs rise faster than they can be passed through.
Transport, logistics, and consumer-facing sectors would similarly come under pressure from elevated fuel and operating expenses, alongside a further erosion of household purchasing power.
At the macro level, sustained deficit financing in a higher-rate environment could intensify crowding-out effects, as government borrowing absorbs liquidity that might otherwise support private sector investment. Combined with a declining standard of living and rising cost pressures, this raises the risk of credit stress and higher default rates across vulnerable households and leveraged firms.
An additional layer of vulnerability lies in Overseas Filipino Worker (OFW) remittances. The Middle East remains a major employment hub for Filipino workers. Escalation or regional instability could disrupt employment conditions (estimated 2.2 million OFWs in the Middle East), delay remittance flows, or prompt repatriation risks. While remittances have historically shown resilience even during regional tensions, heightened uncertainty could dampen household confidence and consumption at the margin—particularly when layered onto rising domestic inflation.
In sum, the conflict raises the probability of a commodity-driven inflation shock superimposed on already liquidity-sensitive markets.
For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks.
In such an environment, tactical positioning and selective exposure are likely to be more prudent than broad-based risk allocation.
VII. Conclusion: When Index Strength Outruns Market Health
The PSEi 30’s early-year advance is best understood as a liquidity-driven, weight-amplified rally rather than evidence of systemic market strength. With ICTSI alone approaching one-fifth of total index weight and the top five constituents exceeding half of the index, performance has become increasingly mechanical—driven by where liquidity concentrates, not how widely it is distributed.
This structure matters. In a cap-weighted index operating within a thin market, marginal flows into heavyweight stocks can produce outsized headline gains even as broader conditions remain fragile.
As geopolitical risks intensify—particularly through energy prices, inflation pressures, and policy constraints—the same index mechanics that amplified the rally could just as easily magnify downside volatility.
In this context, selective and tactical exposure is more defensible than broad risk allocation. Headline strength may persist, but it should not be mistaken for resilience.
