The PSEi 30 6,500 Enigma: A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

 

 The house of delusions is cheap to build but drafty to live in, and ready at any instant to fall—A. E. Housman

The PSEi 30 6,500 Enigma:  A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

Along with the rise in global risk appetite, the Philippine PSEi reached 6,500 but its market internals told a different tale. 

The prospect of easy money has whetted the speculative appetite of the global financial markets.

With the US dollar index down by 0.92% this week, it spurred a rally in the currencies and stock markets of the Asia-Pacific region.

Figure 1

Five of the nine ex-Japan Asian currencies rose, led by the Thai baht (THB), Indonesian rupiah (IDR), and the Singapore dollar (SGD). The Philippine peso  (PHP) increased by 0.14%. The heightened speculative fervor was apparent in the region's stock markets. (Figure 1, upper window)

Seventeen of the 19 national bourses in the Asia-Pacific region jumped by an average of 1.43%. China's SSEC and Sri Lanka's Colombo were the only laggards. (Figure 1, lower chart)

Meanwhile, five of the national bourses set fresh all-time highs for the week: Japan, India, Taiwan, Mongolia, and Pakistan.

Simultaneously, the Philippine PSEi 30 marked a second straight weekly gain. 

However, there is an idiosyncratic story behind the PSEi 30’s surge.

Figure 2

This week's advance brought the PSEi 30 back into positive territory year-to-date (+0.66%). 

But gainers were in the minority, with 14 of the 30 members closing higher. Four of the five biggest market cap issues were the focal point of this week's advance. (Figure 2, topmost pane)

Ironically, the average weekly return was only 0.12%, indicating that on an equal-weighted basis, the overall performance was subdued due to balanced upside and downside returns from its members. 

Market breadth in the PSE was slightly negative, with decliners leading advancers for the second consecutive week. (Figure 2, second to the highest image)

Though mainboard volume fell by 23.1% to Php 3.69 billion, the top 10 brokers still controlled a significant majority, averaging 57% of it. (Figure 2, second to the lowest diagram) 

Further, the top 20 traded issues represented 86.1% of the mainboard transactions. (Figure 2, lowest chart) 

All this illustrates the skewed nature of trading activities where institutional players have been propping up the headline index. 

Figure 3

This week’s pump led by ICTSI (+2.92%) has elevated its free float market cap to its highest level. (Figure 3, topmost chart) 

Pumps in BDO (+8.3%) and SM (+2.35%) have also boosted the top 5's free float cap to 50.5%.  BDO ranked third after SM and ICT in terms of free float market cap. 

The share of the top 5’s free float market cap jumped to 50.5%. 

Incidentally, end-session pumps and dumps were comparatively insignificant compared to previous weeks.

Figure 4

In any case, however one slice or dice it, the slack in volume remains the principal factor behind the nearly decade-long drought in returns.

June's gross volume reached a low not seen since 2010, while the first semester's gross volume plummeted to 2011 levels. (Figure 4, topmost and middle charts) 

It is no coincidence that the declining PSE volume has coincided with the banking system's liquidity metric: cash-to-deposit ratio. (Figure 4, lowest graph)

Despite all the constant yelling by the mainstream of statistical hypes, which have been labeled as G-R-O-W-T-H, the PSEi 30 remains one of the region's laggards, which are likely symptoms of capital and savings consumption.

And notwithstanding the perpetual cheerleading, the echo chamber has still been silent about the mounting risks from debt, leveraging, inflation, and various forms of misallocations and malinvestments. They’ve been reticent about the mounting risks of war too! 

Aside from the distortion from the BSP's policies, institutional pumping remains a significant factor behind this bear market. 

Or, the result of such organized pumps is to magnify pricing imbalance by inflating their share prices relative to their natural income streams and distorting capital prices, resulting in the amplification of the misallocation of resources in the real economy.

Figure 5

In the end, besides political objectives (e.g. rising stocks = resilient economy = good governance), another reason could be to prevent the PSEi 30 from sliding into a death cross, potentially prompting further and deeper scale of foreign selling (as in the past). Figure 5

It's worth noting that despite the obvious shift to a wartime economy, which comes at the expense of the market economy, authorities and the mainstream prefers the general public to remain complacent, assuming that everything will remain hunky dory or stable. 

In doing so, authorities can continue accessing public savings to fund their militant political projects (boondoggle) and exercise centralized control over the economy, with institutional cronies acting as their facilitators.  

Bubbles eventually burst.