Will Q4's Seasonal Strength Prevail? Is the Philippine PSE a buy?

  

There are two kinds of statistics, the kind you look up and the kind you make up—Rex Stout 

Will Q4's Seasonal Strength Prevail?  Is the Philippine PSE a buy?

 

How the PSEi 30’s December and its Q4 performance stacks up against different time frames, and why "past performance is not a guarantee of future outcomes." 

 

I. Will Q4 favor a buy on the PSE?  

Figure 1 

 

As the last quarter of 2023 approaches, this chart (or its slight variation) will likely spread as part of the mainstream's marketing theme. (Figure 1) 

 

The essence is that because the Q4 produced positive returns historically, it is time to "buy, buy, buy the PSE!" 

 

Since 1985, December produced the most monthly returns (averaged) for the PSEi 30!  January was next.  There are "many ways to skin a cat," as they say, but let us use simple averages here. 

 

Moreover, the three months of Q4 also generated unanimous positive returns.  

 

By simple inference, it is time to buy! 

 

II. The Base Effect Rules: December’s Shrinking Returns 

 

But there’s a catch. Changing references or picking base points, which represent the "base effects," alters the results.  

 

Figure 2 

 

Given the varying "reference starting points" of 2000, 2013, and 2018, December's average returns have changed dramatically.  Returns have even shrunk! (Figure 2, upper graph) 

 

Nota Bene: I used 2013 for two reasons:  First, it marks the tenth year, and next, it represents the peak of the PSEi 30 in USD and volume.  2018 signifies the climax of the nominal PSEi 30. 2000 represents the new millennium. 

 

So as the time narrowed, October generated the most returns in the ten-year and 5-year framework.  

 

Finally, monthly returns of 2023 have barely resonated with the 1985 average.  (Figure 2, lower chart) 

 

For instance, the average change in the eight months of August was -.72%, while the average 8-month returns of 37 years was 1.1%.  Also, four of the 8-months saw a deviation in direction, e.g., May was positive in 1985 but negative in 2023. 

 

III. The Story Behind the Big Q4 Returns of 2020 and 2021 

Then there's more.  

Figure 3 

 

The PSEi 30 generated two of its best Q4 performance since 2007 in 2020 (21.8%) and 2022 (14.4%).  (Figure 3, upper chart) 

 

Ironically, the annual change for the same years had been negative, viz., 8.6% and 7.8%.   

 

That said, the enormous Q4 returns signified a recoil to an earlier crash.  Does the PSEi 30 have the same conditions today? 

 

More to this point.   

 

Using the 23, 10, and 5-year frameworks, true enough, returns of Q4 tended to be strong, but annual returns have also been in a downtrend. (Figure 3, lower graph) 

This data reinforces the dominant weak pre-Q4 activities. 

 

IV. Structural Decay in Savings Equals Low Volume: 8-Month Turnover Dropped to 11-12 Year Low! 

Figure 4 

 

A better clue is from the 8-month aggregate volume compared with the PSEi returns and the index level. (Figure 4) 

 

Cascading volume or diminishing stock market liquidity has extrapolated into a bear market or deteriorating returns. The 8-month volume fell to its lowest level since 2011 or 2012—an 11 or 12-year low! 

 

Or, the structural decay in savings and capital has led to diminishing returns in the PSE. 

 

V. Dead Cat’s Bounce Ahead? 

 

Can the PSEi 30 bounce from here?   Sure, anything can happen over the short term.   

 

The BSP may conduct any, a combination of, or all of the following:  

a) cut rates,  

b) restart its QE,  

c) reduce Reserve Requirements (RRR), and  

d) implicitly direct the financial industry to undertake support on the stock market (like China), which it will finance or help facilitate.  

 

Will the recently funded Maharlika Investment Funds or the local version of the Sovereign Wealth Funds (SWF)  be used to pump the market? 

 

...and/or because global central banks may decide to suddenly "ease," global equity markets stage a massive rally. 

 

Besides, index managers have dedicatedly used the low-volume environment as an opportunity to support or prop the PSEi 30 through end-session pumps. 

 

In any case, unless political-economic conditions favor a rebuild of savings, none of these will reignite a bull market.  Instead, distortions from interventions will compound the current predicament. 

 

VI. The Lesson in Quotes 

 

Three quotes to end this terse subject: 

 

1) Ronald Coase:  "If you torture the data long enough, it will confess to anything."    

 

2) Ludwig von Mises: "There are, in the field of economics, no constant relations, and consequently no measurement is possible...Different individuals value the same things in a different way, and valuations change with the same individuals with changing conditions" 

 

3) Therefore..."Past performance is not a guarantee of future outcomes." 

 

Is the PSE a buy?   

 

That would be like "picking up pennies in front of a steamroller." 

 

Caveat emptor. 

"...Get-rich-schemes just don’t work. If they did, then everyone on the face of the earth would be a millionaire. This holds true for stock market dealings as it does for any other form of business activity. Don’t misunderstand me. It is possible to make money – and a great deal of money – in the stock market. But it can’t be done overnight or by haphazard buying and selling. Thus big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator—J. Paul Getty