A Recap of 2022: Philippine Assets Under Pressure: Deficits Plagued the PSEi 30, Philippine Treasuries and the Peso

 A Recap of 2022: Philippine Assets Under Pressure: Deficits Plagued the PSEi 30, Philippine Treasuries and the Peso  

 

Philippine assets (PSEi 30, Philippine Treasuries, and the peso) were under pressure in 2022.  Below is a short explanation of the underlying dynamics driving the deficits. 

 

In 2022: while GDP Outperformed, Domestic Assets Wilted, Treasury Yields Surge 

 

Isn't it a puzzle?  Real GDP will likely print above 7.5% in 2022, but instead of celebrating, domestic financial assets endured much pain for the year. 

 

But why the contradiction?  In a word, inflation.  The underlying driver of the GDP signified a bane to the financial markets.  The high GDP print, therefore, represents a mirage, an artificial statistical construct.  

 

Figure 1 

Not only have yields of the Philippine Treasuries spiraled higher.  The BSP's response to inflation shifted the yield curve from steepening (rising slope) to tightening (flattening slope) at the end of the year.  The changing curves tell a story of financial accommodation towards tightening.  Even more, rising yields illustrate price losses from holdings of fixed-income securities. 

 

But the distribution of liquidity (easing/tightening) is not the same.   

 

On the one hand, higher official rates, rising bank holdings of Held to Maturity (HTM) assets, the actual bank credit delinquencies (but shielded by relief measures), and partial withdrawal of the BSP support of Philippine debt contribute to the recent tightening.  

 

On the other hand, financial easing/accommodation remains in specific segments of the economy.  These have been channeled through the capped interest rates on credit cards, the shift in the monetization of public debt from the BSP to the banking system, which helped support the near-record fiscal deficits, and rising interbank borrowing that has buttressed asset markets.  

 

After all, considering the alteration of the structural economic backdrop towards the dependency on credit, price deflation represents a taboo for central banks. 

 

And in the face of raising rates, the furtive retention of easy money policies into selected segments of the economy resulted in continuing and stubborn price pressures.   

 

As such, Philippine treasuries underperformed the Asian region in 2022 compared to most of its contemporaries, except Vietnam. 

 

Biggest USD Peso Returns Since 2008 

 

Figure 2 

 

Aside from losses in fixed-income markets, the USD-Peso posted its best year in 2022 since 2008 with 9.33% returns.  The USD-Php surged by 15.12% back then.  A rising USD means losses for the peso.  

 

Yet, this year's gains represented the second consecutive year following 2021's 6.2% returns.  In two years, despite the interventions by the BSP, the USD Php registered cumulative returns of 16.1%.  

 

In the same plane, the two-year advance by the USD-Php reinforces its 52-year up trend (based on BSP end-of-year data), possibly fortifying the dynamics of the transition towards the age of inflation.  

 

While the USD rose against most Asian currencies, returns of the USD-Php represented the third largest in the region, after the Indian rupee and the Taiwan dollar. 

 

PSEi 30 Posted a Third Straight Year of Deficit 

 

A vigorous second-semester rebound in the benchmark index, PSEi 30, reduced some of its deficits that emerged from the selloff in the 1H.

Figure 3 

In 2022, the PSEi 30 shed 7.81% (current peso), 13.6% (CPI-adjusted peso), and 14.2% (in USD). 

 

2022 represents the third consecutive year of deficits for the PSEi 30 (gross, real, and USD). 

 

Nota bene:  The percentage share weight of the top 5 market cap issues comprised 45.3% of the PSEi 30 at the close of 2022.  Also, the PSE changes the composite members of the PSEi 30 occasionally.  Therefore, annual returns reflect partial inconsistencies when compared to the past. 

 

The Asian-Pacific region generally suffered deficits in 2022.  Only 5 of the 19 national bellwethers produced positive returns, while the average YoY change was 9.6%.  So, the PSEi outperformed its peers. 

 

2022 Returns: Continuing Trend of Diminishing Returns 

 

Here is the thing.   

 

Despite the managed and orchestrated efforts to prop the index, there seems to be little appreciation that symptoms manifesting a structural defect of the PSEi 30 has resulted in its dwindling returns. 

 Figure 4 

And this disorder does not represent an anomaly.   As previously pointed out, the law of diminishing returns has afflicted returns of the PSEi 30 since 2009.  2020's returns have only validated the prevailing phenomenon. (Prudent Investor, 2022) 

 

As such, the sustained decrease in the peso volume turnover has accompanied this entropic force, resonating with the slowdown in bank liquidity.  

 

The drawdown in volume plays a crucial role in shaping the returns of the PSEi 30. 

 

Again, the encumbrance of the PSE by the law of diminishing returns has been a function of two parts.   

 

First, in response to the Great Recession, the imposition of an easy money regime in the face of a relatively clean balance sheet resulted in a boom in financial assets from 2009-2013 (fixed income, peso, and the PSE).  Or financial assets easily absorbed the accommodation policies of the BSP. 

 

The second phase signified the manifestation of excess liquidity diffusing into the main street as "inflation." 

 

Decreased savings from reduced disposable income represented the partial effects of excess liquidity, which transformed into low liquidity available for PSE investments/speculations.  

 

Further, decreased liquidity also emerged from the extensive use of credit, which resulted in the rise of delinquent accounts.   Also, to shield the balance sheets from mark-to-market losses, banks resorted to the extensive use of HTM assets, which also dwindled liquidity conditions.

Mining and Financials Brave the Selling Storm 

  

Figure 5 

In dissecting the annual performance, the mining and financial index defied the gloom and stayed afloat, generating positive returns of 12.6% and 2.4% in 2022. 

 

While the average deficit of the members of the PSEi 30 was 8.6%, Semirara returned a stunning 61.6%.  Nine of the 30 issues posted positive returns.  After Semirara, Aboitiz Power (14.7%) and BPI (10.7%) took the second and third spots. 

 

Aside from the low volume, other factors exhibited a lethargy in the general sentiment, such as the sustained deterioration in traded issues, total trades, and advance decline spreads.  Also, concentrated trade activities showcased the staged support for the index. 

 

The Paradoxes of the Financial Index; Alpha Returns for the Mining Index? 

 

We end this 2022 recap with a few observations.  

Figure 6 

A steepening of the yield curve typically led to the outperformance of financials relative to the PSEi 30. 

But "is this time different?"  Financials continue to outperform even amidst the compression of the yield spread.   

 

And ironically, Financials has lifted the PSEi 30 even when its primary client, the real estate sector, has been weighed or marked down by the "market." 

 

Lastly, after long years of doldrums, the mining sector exhibits nascent signs of revival and the potential to deliver alpha returns. Will it?