Crossroads (Toward Philippine economic and social progress)
Philippine Star, 9 January 2012

Boom in the stock market.” The PSEi (Philippine Stock Exchange Index) which reached its highest level in 2012 closed the year at 5,812.7, representing a 33 percent from the 2011 closing level. Such performance was second only to Thailand’s among stock markets. In 2011, the PSEi led all other stock exchange indices in its rise.

As I write, the market had further broken through the milestone 6,000 level and closed at 6,044.9 for the first time. Since the market opening for 2013, the market has risen almost four percentage points (by the fourth trading day of the new year). The boom is now on its third year running.

The sectoral rise in the exchange has been persistent in 2012. The financial index (which tracks the financial institutions, especially banks and insurance companies) rose 57.5 percent. The property index (composed of companies engaged in property development and construction) went up 55.6 percent. The holding companies sector index increased 47 percent. All three sectors are highly interrelated. Many of the country’s holding companies have a command of the financial and the property companies that are leading the boom.

The index for manufacturing did not rise by as much but was also high, increasing at 25.5 percent over the year. Only the mining and oil sectors have languished, falling by 17.4 percent.

“Other aspects of the boom.” There are other interesting details about this boom. The PSEi set a new peak 38 times during the year in the midst of day-to-day fluctuations.

The value of stocks that had a turnover of ownership amounted to P1.77 trillion, a record year. This turnover rate was 24.5 percent higher than that of the previous year, which was another high. The increase in the number of trades and in volume happened as a consequence of the extension of the PSE trading hours up to 3:30 p.m.

The market capitalization of the PSE’s listed issues is P13.9 trillion, which is an increase by 25.7 percent from the level achieved in 2011. Hence, the rise of the PSEi is quite broad-based. From a historical point of view, 2012 is a high water mark for the PSE.

The stock market in 2012 was able to raise capital amounting to P219 billion. This was 104 percent more than what was raised the year previous. This was achieved through the usual channels by which new capital is made available to listed corporations. First, this was through initial public offerings in 2012 provided P24 billion for five companies, including two other companies listed by way of “introduction.” Existing listed companies were able to raise P50 billion from “private placements,” P52 billion from “stock rights offerings” and P93 billion from “follow-on offerings.”

“Functions of a stock exchange.” The functions of the stock exchange are little understood. Most people see it as, simply, a sophisticated gambling casino where large fortunes are made and lost. This is partly true. People and institutions that are backed up by funds (namely, the saving of various individuals, companies and other institutions) are invested in stocks for gain. These investors are essentially risking what they have against uncertainty and risk of loss.

Actually, a stock exchange is an institution in which listed companies are allowed to sell their stocks to the general public who want to own or invest in company stocks. Figuratively, it is like a shopping mall that is helped along by agents or brokers. These brokers facilitate the stock trading transactions when orders to buy or sell are made.

Investors in the stock market are there for different and unique reasons. Some of them seek growth of their savings (while facing the risk of failure of the company invested in). These investors are mainly for long term gains, others are there mainly for the short run, simply to make money out of a trade like any trader.

Investors could be individual persons or private institutions seeking to invest funds that they control. Others are for short term trading gains and act like simple buyers and sellers of short notice. Serious investors hold the stocks as assets for long term keeping.

As an institution, the country’s stock exchange has the main function of helping to raise capital for the listed firms. Actually, only a few of the country’s many business enterprises are capable of listing in the exchange.

Only those companies that have reached a certain level of development could qualify to be listed. In turn, while listed companies have unique opportunities for access to capital that can be raised by the exchange, they have their own responsibilities to fulfill.

As a country’s industrial and commercial development matures, those firms that require more capital could seek listing in the exchange. They would have to have an introductory public offering of stock to be able to use the facilities of the exchange in its efforts to raise capital.

“Natural volatility of stock markets.” The recent boom of the Philippine Stock Exchange is one of the bright signs of the current economy. The improvements in perceptions about the current economic prospects are often first felt by movements in stock prices.

These prices are very volatile, however, and they respond to a variety of factors. Large economic trends and shocks affect them. So do small events that affect only specific companies, and even factors that might only be peculiar to specific company issues.

For the moment, these factors are very positive. Oftentimes, positive factors feed on positive events. They foretell a boom or even build upon a boom. The trading of the stocks rise because of growing interest in them which, in turn, causes their price to rise.

When negative factors dominate, they could also threaten to form a chain of negative expectations and panic selling actions. The resulting events could fuel a sale of stocks in expectation of their fall in prices. Such selling pressure leads to the fall of stock prices.

Such forces could help to build destabilization. Modern stock exchanges have introduced “circuit breakers” or trading breaks when movements in particular stocks tend to be too brisk for comfort. If the whole exchange moves in one direction continuously, so that there is market fear, “market intervention” could be required.

(To be continued)

Disclosure: The CEO and president of the PSE, Hans Sicat, is my son. My views on the market are independent of his thinking. I would have written more on the topic but for the likelihood of potentially misunderstood indelicacy. If I were not an economist naturally drawn to the topic, I would still by personal interest follow stock market developments closely.