Crossroads (Toward Philippine economic and social progress)
Philippine Star, 15 March 2017


Stock market fluctuations demonstrate the interaction of economic and political factors, a good demonstration of the impact of domestic and external headwinds on economic activity.

Recent stock market fluctuations: 2016 to March 2017. We are witness to the relative flatness of the market in the current quarter of 2017. Since the opening of the year, the index has been hovering around 7,200 percentage points.

The stock market fluctuations in 2016 was different. During the second half of the year, the index had been mainly on the downside, having started the year in comfortably rising level. It rose to a peak of around 8,000 in July to August and then it began falling toward 7,400 to a low of 6,800 by early November, further ending close to 6,600.

That was a large fall in magnitude. Counting from the level of 7,400, to be at 6,600 represents a 10.8 percent drop in market value.

The first half of 2016 was the campaign period for the May 11 election. The market was volatile, reacting only to daily factors, but investors were carefully positioning to take advantage on who would win the presidency.

In May, Rodrigo Duterte emerged triumphant. A small market surge happened afterward to June. By July, when he assumed power, the peak of the market had occurred and the market downturn began.

The Asian regional markets in the meantime. Not too long ago, the Philippine stock market was one of the most sterling performers in the Asian region. Propelled by perceived positive news, and especially buttressed by sound macroeconomic indicators, the Philippine equity market moved forward.

The key area of comparison with the Asian markets would best be demarcated by how the equity markets have performed after the Trump election in America. The Trump factor has operated – and in America in the short-run in any case – to jumpstart the equity stock markets with its promise of tax cuts, protectionism, promise of deregulation, and an increase in infrastructure spending.

However, the other policy measure the markets anticipated was coming – the US central bank’s program of rising interest rates as an antidote toward preventing economic overheating and inflationary tendency.

On balance, there is much enthusiasm happening in the American stock market. Some analysts are beginning to talk again of “animal spirits” on the loose.

The main markets in Asia have also reacted positively to these developments. The Nikkei index in Tokyo in early March is more than 2,000 points above its December value. The Hang Seng index in Hong Kong is also higher by more than 1,000 points. Up too are Singapore’s and South Korea’s indexes.

But in the Philippines, the market’s direction has been the opposite. It has gone bearish despite the continuing strong macroeconomic foundation of the economy up till now.

Much of what has happened can be deduced from examining them from the Philippine market over the same period. These events, it turns out, have their connection to political factors even as some volatility might be also strongly influenced by the Fed’s rising interest rate policy change.

Dissecting foreign investment flows in the Philippine stock market. Daily transaction value of the market in 2016 averaged P7.8 billion. In the first two months of 2017, this fell to P6.3 billion indicating a drop in volume by P1.5 billion per day.

In terms of total monthly transactions, the total fall in volume of transactions from 2016 to the first two months was P30 billion per month.

During the first five months of 2016, the trading of Philippine equities by foreign investors almost evened out, though there were small fluctuating imbalances. But after the election of Duterte, there was net buying for about a period of three months.

It was strong net foreign buying of Philippine equities, indicating very positive expectations of Duterte for foreign investors. In May, June and July, net foreign buying as a proportion of the total daily sales of Philippine equities was, respectively, 6.5, 8.8, and 11 percent.

By August, the sentiment for net foreign buying began to die down. The campaign against illegal drugs had captured the nation’s attention. Statistics on killings, and international attention, was getting heavily noticed.

International criticisms from different sectors – the United Nations Secretariat, the European Union Commission and from the US State Department – led the new President to answer his critics with intemperate and colorful language. Then in October, his “go to hell” outburst to Obama happened. This was followed by the visit to China, signaling foreign policy redirection.

Strong net selling of Philippine stocks began by September and was capped by the highest net selling in November 2016, which amounted to almost P1 billion a day. The effects of the go-to-hell Obama tirade and the US election of Donald Trump caused this heavy net selling which was 13 percent of the turnover of stocks.

Before the year ended, there also heavy net selling of Philippine stocks by foreign investors. As a percent of total stock sales, it was 7.5 percent in September and 8.1 percent in December).

The net selling of Philippine stocks by foreign investors continues in 2017. In percent of total daily turnover, this was 4.5 percent in February and 3.6 percent in mid-March.

Can we recover? Loss of confidence breeds fear and uncertainty in investing. Stock market investing is essentially fueled by sentiment, by reaction to events and by perceptions of the future. They can be reversed by positive events and by change of behavior.

I think President Duterte might have learned part of the lessons of governing, that words spoken matter a lot and can generate unlikely and unexpected consequences. More recently, and after many events when he had to explain a lot of things said wrong or in a hurry, he had been in general more quiet and thoughtful.

Moreover, should he succeed in passing his tax reform program, he could take command of the future in a positive way. Otherwise, we could lose ground.