The past is a source of knowledge, and the future is a source of hope. Love of the past implies faith in the future—Stephen Ambrose
Are Foreigners to Blame for Liquidating "Cheap" PSEi 30?
The PSEi 30's recent breakdown has made the mainstream anxious. They point to foreign money as culprits for the sell-off. Eight factors to consider.
Bloomberg/Edge Malaysia, September 12: A selloff that’s made Philippine stocks the worst across Asia’s emerging markets may have further room to go, as concerns about a hawkish central bank keep foreign investors on the sidelines. The Philippine Stock Exchange Index has slid 3.6% so far this quarter, wiping out more than US$11 billion in market value. A hawkish pivot by the central bank — as inflation creeps back up — is blunting the appeal of local equities for global money managers from BNP Paribas Asset Management to Franklin Templeton. Like many economies in Southeast Asia, the Philippines is dealing with renewed concerns about supply-side inflation. Worries about much weaker-than-expected growth along with a stronger US dollar are exacerbating fears that the nation may see more pain ahead.
Sales promotion or opinion or facts-based report? Why do contemporary media stray into the area of tacit advocacies? Have they been promoting the interests of unstated groups? Do they even make "conflict of interest" disclosures?
Facts? Yes, selectively. Pushing one statistic to justify a conclusion represents "begging the question."
The mechanical reaction for the mainstream is the "attribution bias" (blame external forces) on events that go against their interests.
Figure 1
Have Philippine stocks been cheap? (Figure 1, topmost chart)
It depends on where you look.
True. Because Earnings Per Share (EPS) has been increasing, recent price pressures have decreased the Price Earnings Ratio (PER), thus "cheap." (Figure 1, middle window)
But that's mostly smoke and mirrors.
Eight things to consider:
1) Overstatement of Financial Conditions. Rising EPS can be a result of overstatement. Have PSE firms been transparent?
For instance, PLDT's Php 48 billion unauthorized "overspending" spread over four years means that the largest telco firm understated costs and likely overstated the bottom line. Four years!
What have authorities done to enforce restitution in favor of the investing public? Have authorities made moves to remedy such lapses in governance (of affected firms and the supervisory agencies)? How many of the listed firms have been inflating their financial statements?
2) Integrity. If officials have patently glossed over the perpetual end-session pumps and dumps, why shouldn't this compromise the integrity of prices and fundamentals of listed firms?
3) Selective perception. EPS ignores all other data and supporting theories. It fundamentally discounts how the historic debt of the PSEi 30 has been outgrowing EPS. PSEi 30 Non-financial debt grew by Php 389.5 billion, 4.6x the Php 84.7 billion net income in the 1H 2023. (Figure 1, lowest graph)
4) Stock market cycle. The EPS omits the stock market cycle.
Figure 2
The PSEi 30 is in a bear market cycle, whether seen from the USD or its nominal value. The milestones may be different, but the stage/phase of the secular cycle is quite clear. (Figure 2)
The PSEi 30 in USD peaked in 2013 and traded sideways until 2018 before succumbing to a bear market. In the same period, the USD Php rose, offsetting the advances of the nominal PSEi 30.
The nominal PSEi 30 climaxed in January 2018 and tumbled into a grinding bear market.
5) Foreign Money. Have foreigners been a material issue in the fate of the PSE? Or have foreigners been "fleeing" the PSE?
Figure 3
Even as the PSEi 30 has slumped, foreign outflows have been moderating based on the BSP's Foreign Portfolio data, but this includes fixed-income positions. (Figure 3, upper pane)
Foreign savings should fill the gap of the eroding domestic capital. Foreign interest in local stocks hit its pinnacle in 2013, coincident with the peak in the USD PSEi 30. But since then, foreign flows have been in a downtrend.
The trend of annual PSEi 30 returns has chimed with foreign selling, which has dominated the PSE since 2018. (Figure 3, lowest chart)
During the largest outflow in 2020, the annualized PSEi 30 produced an 8.64% slump, more modest than the 12.8% dive in 2018, when foreign money outflows were more subdued.
The point is, yes, foreign selling has partly affected PSE returns, but this is primarily a local problem. If there had been sufficient local savings, it would have negated these foreign liquidations.
Figure 4
6. Yield Arbitrage. Accompanying the PSEi 30 bear market have been wider spreads of US rates (10-year) relative to the Philippines treasury (gross PDS data). But this hasn't diffused into a surge in outflows. (Figure 4, topmost chart)
Instead, it diminished the entry of portfolio capital. Or it reduced the motivation of foreign money to load up on local stocks.
But this overlooks the changes in the local political-economic component. For instance, the pandemic economic closure incited the exodus of foreign portfolios (PSE data).
7. The essence: savings. A lack of volume has plagued the PSEi 30 (exhibited annually or monthly).
To repeat. The inadequacy of PSE volume is a manifestation of diminishing savings. (Figure 4, middle and lowest charts)
Figure 5
Diminishing PSE volume (% YoY) has coincided with the declining rate of bank cash reserves. The downtrend in cash-to-deposit has synchronized with PSEi returns. (Figure 5, top and middle charts)
Summarily, NO accumulation of savings, NO increase in PSE trading volume. Therefore, NO volume, NO bull market.
Statist/interventionist/anti-market policies and inflation (tax) or bubble-blowing policies consume savings.
Good luck to those who believe otherwise.
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