Important Insights from the Philippine PSEi 30’s Melt-Up!

 

Investors believe in Keynesianism.  They believe that increased government spending will make us all richer.  This illusion is what is driving this stock market. Bubbles are based on illusions—Dr. Gary North 

In this issue

Important Insights from the Philippine PSEi 30’s Melt-Up!

I. Philippine PSEi 30 Returns Among the World’s Highest

II. Lessons from China’s Previous Easy Money Experiments

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience

IV. Retail Players Emerge

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion

Important Insights from the Philippine PSEi 30’s Melt-Up!

What does the outperformance of the PSEi 30 likely mean?

I. Philippine PSEi 30 Returns Among the World’s Highest

The Philippines' primary equity benchmark, the PSEi 30, stretched its weekly winning streak to five with this week’s 0.53% gain.

This week’s gains pushed its year-to-date returns to 15.8% (as of October 4th).

Figure 1

Accompanied by a massive rally in the Philippine peso, the Philippines' ETF, the EPHE, joins the ranks of global top equity ETFs in terms of US dollar returns (as of October 2nd). (Figure 1, upper window)

Year to date, the PSEi 30 ranked fourth in Asia, after Pakistan, Hong Kong, and Taiwan. (Figure 1, lower image) 

With 16 of the 19 regional benchmarks up by an average of 13.13% in local currency terms, we can generalize that 2024 has been a year of the bulls. Of course, we have two more months to go.

II. Lessons from China’s Previous Easy Money Experiments

Despite recent elevated rates, the current surge in global stocks signifies a product of easy money.

Due to the massive coordinated bailout package unleashed by Chinese authorities to rescue its struggling asset markets (stocks and real estate), Chinese and Hong Kong equities skyrocketed, rising by a stunning 23.4% and 31% over the last four weeks.

However, the returns of China’s equity markets have been capped due to a week-long holiday.

Figure 2

Though many international experts have suddenly become apostates to a perceived return of China’s bull market, I recently pointed out in a tweet that... (Figure 2)

"While previous episodes of government stimulus did bolster valuations, they turned out to be short-lived, highly volatile, and resulted in diminishing returns for #SSE levels. The 2016 & 2020 support had little impact on its bear market. Will history rhyme?"

Or whatever boom that took place before tended to morph into a bust. Even worse, the subsequent stimulus produced diminishing returns with the lower levels of the Shanghai Composite Index (SSE).

In other words, monetary inflation or stimulus from credit expansion must be applied at a much larger scale than before to magnify the effects of a boom. 

As the great Dean of Austrian economics, Murray Rothbard, once warned 

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. (Rothbard, 2015)

China’s experience has somewhat resonated with the Philippines.

Figure 3

It took a combination of historic rate cuts, massive reductions in reserve requirements, unprecedented relief measures, and direct injections by the BSP into the banking system via the expansion of its balance sheet to rescue the Philippine PSEi 30 in 2020. (Figure 3, upper image) 

The PSEi 30 peaked in 2022 along with the cresting of the BSP's assets. 

It is also not a coincidence that the PSEi has wilted in the face of the slow-motion erosion of the BSP’s balance sheet, which was eventually reversed in 2023. 

The BSP’s U-turn put a floor under the PSEi 30 and rebooted the current rally. 

One can probably thank Other Financial Institutions (OFCs) for representing part of the National Team supporting the PSEi 30. 

The BSP has been rebuilding its asset base, this time from external borrowings by the National Government and the banking system. 

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience 

Of course, the difference between the bull market of 2009-2013 and today is that the PSEi 30 run has barely been supported by volume and breadth. 

Main board volume remains substantially below the level reached at even lower PSEi 30 levels in 2022. (Figure 3, lower graph) 

Because of this obsession with pumping the index to portray a bull market, the "national team" has concentrated its aggressive stock-pumping activities on the top heavyweights. 

As a result, the market capitalization share of the top five companies reached 51.1% last October 4, following a record 51.92% last April.

Figure 4

Furthermore, because RRR cuts and BSP rate cuts were sold to the public as policies that would accomplish economic nirvana, the Financial/Banking Index roared, with year-to-date returns spiking 37.7% and its index soaring to a record high! (Figure 4, upper chart) 

Astoundingly, shares of China Bank [PSE:CBC] have spiraled in ways echoing Bitcoin, GameStop [NYSE:GME], and Nvidia [Nasdaq:NVDA]! (Figure 4, lower pane)

CBC posted 91.3% year-to-date returns, with much of that accomplished in the last four weeks!

Figure 5

If history tells us anything, bank share prices going berserk could mean anything other than economic or financial prosperity. The experiences of Lehman Brothers and Bear Stearns provide examples: their share prices sprinted to an all-time high before collapsing, heralding the Great Financial Crisis (2007-2008). (Figure 5, topmost chart)

To be clear, we aren’t suggesting that CBC and other record-setting bank shares, such as BPI, are a simulacrum of Lehman; rather, we are pointing to the distortive behavior of speculative derbies that may hide impending problems in the sector. 

Of course, foreign buying did provide support to the national team. For the first time since 2019, the PSE posted net inflows of Php 108 million in the first nine months of 2024. (Figure 5, middle graph)

Meanwhile, in the PSE, the cumulative market share of the PSEi 30’s best-performing ICT and the three PSEi 30 banks has reached 32.73%, which is closing in on August's record of 33.14%.  

IV. Retail Players Emerge 

However, signs indicate that the retail segment appears to be jumping on board the developing mania, which has been marketed as another version of the "return of the bull market." 

Though still negative, 2024’s nine-month breadth has had the best showing since 2017. (Figure 5, lowest image)

Figure 6

Furthermore, the declining share of the top 10 brokers relative to the MBV could be another contributing factor. It was 60.4% in the week of October 4th, down from a recent high of over 65%. (Figure 6 upper visual) 

Major brokers could utilize 'done-through' trades or outsource trades with partner brokers to conceal or dilute this number.

Despite the paucity of volume, the trading share of the top 20 most-traded issues has dropped to about 80% for the fourth consecutive week from the previous range of 84-86%. (Figure 6, lower diagram)

Figure 7

Since the low on June 21st, the returns of the top 10 heavyweights delivered the bulk of the gains for the PSEi 30. While 23 issues closed higher, 2 remained unchanged, and 5 declined. The average return of the top 5 was 26.84%, while the average return for the top 10 was 26.4% (Figure 7, topmost graph) 

Breadth was largely incongruent with this week’s 0.53% returns, 83% of which were attributable to Friday’s pre-closing pump. Although 18 of the composite PSEi 30 issues closed down, the upside volatility allowed for a positive weekly return of 0.21% (Figure 7, middle image) 

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion 

Finally, SMC share prices continue to move diametrically opposite to the sizzling hot PSEi 30. (Figure 7, lowest graph) 

What gives? Will SMC’s debt breach the Php 1.5 trillion barrier in Q3?   

Have SMC’s larger shareholders been pricing in developing liquidity concerns? If so, why are bank shares skyrocketing, when some of them are SMC’s biggest creditors? 

Bottom line: The levels reached by the PSEi 30 and its outsized returns attained over a few months barely support general market activities, which remain heavily concentrated on the actions of the national team and volatile foreign fund flows. 

Instead, the present melt-up represents an onrush of speculative fervor driven by the BSP’s stealth liquidity easing measures, even before their rate cut. Moreover, real economic activities hardly support this melt-up.

___

reference 

Murray N. Rothbard, Why the Recurring Economic Crises?, August 27, 2015, Mises.org

 

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

  

Lowering rates is a tool to rescue the government, but it will also make the Treasury add more debt in the next few months. If you make it easy for governments to borrow, they will gladly do it and continue printing currency, leading to the currency’s slow decline—Daniel Lacalle 

In this issue

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High!

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

V. Strong Peso Resulted in Lower Public Debt Last August

VI. Conclusion

Marcos-Nomics Stimulus Update: August Budget Deficit Narrows, Strong Peso Reduces Public Debt, and Amortization Payments Reach All-Time High! 

The "Marcos-nomics Stimulus" remains intact. Though deficit spending "narrowed" and public debt fell in August, technicalities and political agenda like pre-election spending points to the government’s deferred actions. 

GMA News, September 25, 1965: The Philippine government yielded a narrower fiscal shortfall in August amid growth in state collections and contraction in expenditures during the period. Data released by the Bureau of the Treasury on Wednesday showed the national government’s budget deficit stood at P54.2 billon last month, lower by 59.25% than the P133-billion fiscal gap seen in August 2023. “The lower deficit was brought about by the 24.40% growth in government receipts alongside a minimal 0.68% contraction in government expenditures,” the Treasury said. August’s fiscal balance brought the year-to-date budget shortfall to P697 billion, down 4.86% from the P732.5-billion deficit in the same period last year. 

Since the government has shifted VAT collections to an end-of-quarter basis, and given that the majority of public spending is typically programmed for the end of the quarter, the essence of the government’s balance sheet scorecard will be most relevant at the end of each quarterly period. 

In any case, we’ll do a short analysis. 

I. A Growing Dependence on Non-Tax Revenue Growth? Or, Padding the Government’s Top line?

Figure 1 

Although it is true that the fiscal deficit improved in August—largely due to a combination of decreased expenditures (-0.7% YoY and -9.4% MoM) amidst a mixed performance in revenues (+24.4% YoY and -15.5% MoM)—the most significant aspect is that the year-to-August deficit dropped from the third highest to the fourth highest in the Treasury's records. 

Nonetheless, nominal figures suggest that August's performance aligns with the exponential trendline for both variables. Additionally, the general uptrends in revenues and spending remain intact. (Figure 1, topmost pane) 

As such, since peaking in 2020, 8-month financing by the Bureau of Treasury has slowed compared to last year. The Treasury remains liquid, with approximately Php 504 billion in cash, marginally lower than Php 509 billion last year. (Figure 1, second to the highest chart) 

But the thing is, non-tax revenues have anchored a substantial segment of the progress in revenue collections. Non-tax revenues rocketed 252% year-over-year last August and soared 58.9% year-to-date compared to the same period in 2023. This growth spike pushed up the segment’s share of revenue to 17.12%—its sixth consecutive month of double-digit representation. In the eight months of 2024, the non-tax revenue pie swelled to 14.53%—the highest since 2015 (Figure 1, second to the lowest and lowest graphs) 

According to the Bureau of Treasury: Income collected and generated by the Bureau of the Treasury (BTr) rose to P16.5 billion in August, more than twice its collections in the same period a year ago. The increase was primarily driven by PSALM’s P10.0 billion settlement of guarantee fee arrears, alongside increased PAGCOR income. Compared with January-August 2023’s actual collections of P150.1 billion, BTr’s YTD income for the current year has similarly improved by 33.46% (P50.2 billion) to P200.3 billion, largely due to higher dividend remittances, interest on advances from GOCCs, guarantee fee collections, and the NG share from PAGCOR income. Collections of other offices (other non-tax, including privatization proceeds, fees and charges, and grants) in August surged to P49.6 billion, nearly quadrupling last year’s outturn. (BTR, September 2024) [bold mine] 

Has the government been padding their revenue numbers partly by inflating the non-tax revenue component? Or are they becoming dependent on it? Unlike previous episodes where non-tax revenues spiked in a month or two, this marks the first time the share of this segment has been in double digits for six consecutive months 

II. August’s Decline in Public Spending Due to Technicalities, Robust Pre-Election LGU Spending 

The next item is expenditure.

Figure 2

Although decreases of .68% year-over-year (YoY) and 9.4% month-over-month (MoM) and year-over-year (YoY) were recorded in August, the expenditure for the first eight months grew by 11% YoY to a record Php 3.69 trillion. (Figure 2, topmost window)

The decline in August was primarily due to a -3.7% YoY and -4.1% MoM contraction in the National Government’s disbursement, even though spending by local government units (LGUs) remained vigorous at +9.34% YoY and -4.3% MoM.

But authorities explained the reasons behind this.

Again from the BTR: This can be partly attributed to the lower total subsidy releases to government corporations, and the sizeable outstanding checks recorded in various departments, such as the Department of Public Works and Highways (DPWH), the Department of Social Welfare and Development (DSWD), and the Department of Health (DOH), during the period. Outstanding checks represent payments made by line departments for the delivery of goods/services but are not yet presented for encashment at the banks by the concerned contractors or payees. These remain under the accounts of spending agencies in authorized government depository banks and are not yet considered as actual disbursements in the Cash Operations Report. [bold mine]

In short, the most recent uncashed disbursements from the National Government will be reflected in upcoming data.

As it stands, the brisk growth of spending by local government units (LGUs) likely signifies the pre-election (mid-term) spending.  The cumulative data for the first eight months (+9.65% YoY) reached its second highest level since the record set in 2022, which, coincidentally, was the year of the Presidential Elections. (Figure 2, lower window)

This trend is expected to be sustained as we approach the 2025 elections.

III. Eight-Month Amortization Payments Hit All Time, Debt Servicing Cost at Annual 2023 Levels!

Lower interest payments accounted for yet another reason behind the decrease in expenditures last August.

Interest payments fell by 33.6% month-over-month (MoM) but surged by 23.7% year-over-year (YoY).

Despite this, the cumulative interest outlays for the first eight months increased by 31.1% YoY, reaching an all-time high of Php 509.44 billion. Its share of allotment rose from 11.72% in 2023 to 13.81% in August, representing the highest level since 2009! (Figure 2, lowest chart)

That’s not all.

Figure 3

In peso terms, the amortization expenditures from January to August surpassed last year’s high, setting a new record! (Figure 3, topmost image) 

Strikingly, amortization expenditures for 2024 amounted to Php 1.041 trillion, which is 6.7% above the 2023 annual total of Php 975.3 billion.

While interest and amortization levels (in peso terms) reached milestone highs, the cumulative debt servicing costs for the first eight months amounted to Php 1.55 trillion—just 0.33% (Php 53.432 billion) lower than last year’s annual debt servicing cost of Php 1.604 trillion! (Figure 3, middle diagram)

Despite this data being publicly available, there has been little coverage by the mainstream media or commentary from the establishment.

More than anything else, do you see the reason driving the Bangko Sentral ng Pilipinas (BSP) to cut interest rates and reserve requirements (RRR)?

It’s all about an implicit government bailout through the provision of liquidity support and the lowering of debt servicing costs!

Net claims on the central government (NCoCG) by universal-commercial banks have risen in tandem with public debt. (Figure 3, lowest image)

Figure 4

These measures are part of the 2020 pandemic rescue template, which includes various regulatory accommodations (such as relief measures and subsidies) as well as direct interventions (liquidity injections) from the Bangko Sentral ng Pilipinas (BSP).

Even now, the BSP’s net claims on the central government (NCoCG) have mirrored the monthly oscillations in public spending. (Figure 4, upper visual)

Furthermore, considering the political economy's structure derived from trickle-down policies, these rescue efforts are not only designed to benefit the government; they also serve the interests of politically connected elites.

Fundamentally, the BSP provides elite-owned banks with benefits through favorable policies and implicit bailouts. In return, these primary financial institutions partially complying with capital requirement rules provide liquidity to the Philippine treasury markets.

Has the narrowed deficit been engineered to address this? We argue that it has not.

IV. Mounting Neo-Corporatism/Fascism Policies: Privatize Profits, Socialize Costs

Haven’t you noticed that this administration has been gradually appointing members of the elite circle to higher echelons of political power?

While the intention may be to create a "business-friendly" environment, this situation reeks of "pro-big business" rent-seeking cronyism.

How will MSMEs thrive in the face of the onslaught of inflation, taxes, and regulations being imposed?

For instance, due to mandates and new taxes, major online eCommerce platforms have required SME sellers to register with the government, comply with new regulations, and pay new taxes.

In response, an influx of aspiring online entrepreneurs has led to a significant surge in business registrations, which both the media and the government are celebrating as a boom!

But how many of these businesses will survive the sustained rise in inflation and the increase in compliance and transaction costs?

How many of these hopeful entrepreneurs—whether driven by necessity due to a lack of jobs or insufficient income—will be able to employ people, especially with recent increases in minimum wages?

Yet, who benefits from the reduction of competition? SMEs or the elites?

We read that some elites have partnered with the government to embark on initiatives to promote MSMEs.

While partnerships like these may seem ideal, how do raising barriers to entry actually promote entrepreneurship?

These initiatives, which the public perceives as beneficial political "do something" actions, are, in fact, a display (smack) of hypocrisy largely intended for election-related public relations.

Moreover, some proponents have advocated for the privatization of certain infrastructure institutions.

While this may seem beneficial in "simple" theory, without competition, tax relief, and the easing of regulatory and administrative obstacles, such privatization is likely to result in the privatization of costs while socializing losses, or could deepen the embrace of neo-fascism, corporatism, or crony capitalism.

V. Strong Peso Resulted in Lower Public Debt Last August 

Apart from inflation, the surge in debt servicing costs represents a secondary symptom of deficit spending, with the direct effect manifested through public debt.

From the Bureau of Treasury (BTR): National Government’s (NG) total outstanding debt stood at P15.55 trillion as of the end of August 2024, reflecting a 0.9% or P139.79 billion decrease from the end July 2024 level…Meanwhile, NG external debt amounted to P4.76 trillion, a decrease of 3.6% or P178.25 billion compared with the end of July 2024 level. The decline was brought about mainly by peso appreciation, which trimmed P194.90 billion, as well as net repayments of P4.17 billion, although stronger third-currencies added P20.82 billion in valuation effects (BTR, October 2024) [bold added]

As the BTR admitted, the revaluation effects stemming from a rare 3.9% appreciation spike in the Philippine peso, based on their data, contributed to a marginal reduction in Philippine debt. 

Breaking down the data: external debt decreased by 3.6% month-over-month (MoM) but rose by 4.4% year-over-year (YoY). Meanwhile, domestic debt increased by 0.4% MoM and 10.22% YoY. (Figure 4, middle image) 

As a result, the spike in the Philippine peso pulled down the percentage share of external debt relative to the total, which has been rising since its trough in March 2021. 

Although the narrowing of the budget deficit from July to August, driven by a slowdown in public spending, may alleviate some pressure to increase borrowings, it is likely that the government has merely deferred its spending pressures to the end of the quarter and the end of the year.  (Figure 4, lowest image) 

Second, the government announced that it raised USD 2.5 billion last August. 

Figure 5

This addition will contribute to the external debt stock, which reached an all-time high in Q2 2024 and is expected to increase further in Q3. (Figure 5, topmost graph)

External debt has now surpassed the Gross International Reserves (GIR), even though part of these borrowings is counted as part of the GIR. For instance, when the National Government raised USD 2 billion last May, the proceeds were incorporated into the June GIR: "The month-on-month increase in the GIR level reflected mainly the National Government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds." (bold added) (Figure 5, second to the highest chart) 

Make no mistake: borrowed reserves require payment, and treating them as retained earnings or savings misrepresents actual reserves. 

Third, it is doubtful that the recent appreciation of the Philippine peso is sustainable. 

In contrast, the rising trend of the USD-Peso exchange rate partly reflects the "twin deficits" as a consequence of the government’s deep embrace of Keynesian policies that posit spending will lead to economic prosperity. (Figure 5, second to the lowest and lowest graph) 

These deficit spending policies, which depend on an easy money regime favoring the elite, have led to a record savings-investment gap that must be funded by a domestic population constrained by low savings, making it increasingly reliant on overseas savings. 

In summary, the widening savings-investment gap—partially expressed through the BSP-Banking system's funding of historic deficit spending via record-high public debt—has contributed to the weakness of the Philippine peso.

Therefore, the current decline in public debt due to the peso appreciation represents an anomaly (a bug, not a feature) rather than a trend. 

With this context in mind, one must ask: who will bear the rising costs of ever-increasing public debt and its servicing—through higher taxes and inflation? 

Is it the elites, with their army of accountants and tax lawyers, shielding themselves from their direct obligations? Is it the elites who employ financial experts and, indirectly, the government, which allocates resources to benefit from inflationary policies? 

Or is it the average Mario and Juan, who have little means for protection? 

VI. Conclusion

The "Marcos-nomics stimulus" measures remain intact.

The recent cut in the official interest rate, along with an expected series of further cuts and adjustments to reserve requirements, indicates a sustained trend of deficit spending, point to an expansion of monetary easing aimed at jolting the private sector economy and achieving political agendas through spending on pre-election, the war economy, infrastructure, welfare, bureaucratic expansion and etc., in addition to boosting GDP for financing purposes.

____

References 

Bureau of Treasury, August 2024 NG Budget Deficit Down to P54.2 Billion, treasury.gov.ph, September 25,2024

 

Bureau of Treasury, National Government Debt Recorded at P15.55 Trillion as of End-August 2024, treasury.gov.ph, October 1, 2024