Diminishing Returns Have Plagued the PSEi 30 Since 2009!

Led by orchestrated pumps on a few heavyweights, the PSEi registered an incredible 10.2% MoM return in November.     

Figure 1 

Combined with the 7.2% gains in October, the two-month returns represent the largest since Sept-October 2010, the onset of a bull market.   

 

Many financial pundits have called for a "turnaround from the bear market." 

 

But are they looking at the right pictures? 

In contrast to popular opinion, diminishing returns have haunted the PSEi 30 since 2009.    

The YoY % change in November remained in a deficit, reinforcing its secular downtrend since 2009. 

The question is, what brought about such conditions?  Only from knowing the causation can we get a clue on its reversal.  

The BSP's zero-bound rates have led to the benchmark's lower returns.   

 

Figure 2 

It has fueled a surge in systemic debt (public and bank credit expansion) which also resonates with the decline in the yield of the PSEi 30.

As leveraging expanded, it eventually sapped out liquidity from the financial system through malinvestments, and so did the returns of the PSEi 30. 

 

Figure 3 

The liquidity classification for the above is the money supply growth (M3), representing the economy and bank liquidity via the cash-to-deposits ratio.  

Figure 4 

Finally, the slowdown in the CPI coincided with the peak in returns of the PSEi 30 in 2009.   

However, the comeback of the CPI in 2015 has also been accompanied by the slowing of the yield rate. 

Let us be clear.  The (statistical) inflation has always been present, except for the September and October deflation in 2015.   

What changed is the trend of the rate of change or its asymmetric distribution.   

But (monetary) inflation turned up in different areas at different times. Or, the process appeared as stages.  

First, the asset markets absorbed the liquidity.  

Later, liquidity percolated into the real economy as “inflation.”

The PSEi 30 rode the 'genuine' bull market from 2009 to 2013 from its deluge.   The bull market was not just stocks but also seen in the peso and the fixed-income markets. 

But as the equity benchmark sprinted higher, returns declined.  

Next, the spillover of excess liquidity into the real economy magnified economic imbalances.  

Subsequently, this eroding bank liquidity spread into the financial system and the economy.    

Figure 5 

Such imbalances became evident in the downtrend in turnover of the PSE. 

Consequently, it reverberated in the returns of the equity market. 

BSP policies have plagued the PSEi and the PSE through the law of diminishing returns.   

 

With all the accumulated maladjustments, how do you think the BSP can undo or overturn this?