Sunday, April 17, 2011

The Philippine Stock Exchange and Financial Globalization

Last week’s spike in the prices of the Philippine Stock Exchange [PSE], the publicly listed monopoly franchise that operates the domestic stock exchange and allied services, brought to light some of the ongoing developments of the world stock markets.


The PSE Makes A Big Move

First, I’ll deal with the Philippine Stock Exchange.

The PSE flew on the account of the 1:1 stock dividend[1] which the company declared last week. (Disclosure: I have long been a shareholder of PSE)

The chart formations presage many bullish signs in the PSE price actions.

One, there is the bullish reverse head and shoulders pattern by the blue descending line which signify as the neckline. And secondly, an uptrend channel (marked by the green lines) over the past two years, signifying a mid term trend.

The recent breakout only highlights of the fulfilment to these patterns (of course subject to the buoyancy of the overall market sentiment)

In addition, the PSE reached over php 700 per share when the Phisix topped at 3,800 in 2007. Today, the Phisix trades at over 4,200.

Aside from being a monopoly, the kismet of PSE depends on the general actions of the Phisix and of the broader domestic market. Thus, higher Phisix should equally be reflected on the share values of the PSE.

So for me, the PSE functions like an index fund or the equivalent of an Exchange Traded Fund (ETF) representative of the Phisix. Thus, for as long as the Phisix is headed higher so should the PSE. It’s almost like a no-brainer investment theme.

And that’s the domestic perspective.

Mergers & Acquisition, Collaboration and IPOs

Next, I have written about the prospects of consolidation or integration of global stock markets.

In 2007 I wrote[2],

With the revolutionary advances in the field of communications and information technology-the advent of on-line electronic trading platforms makes it possible for real-time electronic transactions regardless of the geographical distance.

Grounded on this premise, the major exchanges appears to be in a rush to integrate financial services, to diversify and expand their market coverage, reduce transaction (bookkeeping, clearing and settlement) costs by achieving the economies of scale, to eliminate further inefficiencies by way of human intervention, provide for financial depth by attracting global investors (to augment the demand side), traders and listing companies (to increase supply side), to improve on liquidity by easily matching buyers and sellers, and finally, adapt to the ongoing changes in marketplace by being accessible to the growing significance of institutional investors [pension funds, hedge funds, mutual funds and insurance companies] as compared to retail investors in the past.

With the global trade and economic structure presently favoring Asia, as evidenced by its exploding foreign exchange reserves and rapidly rising per capita and middle class, its largely fragmented and underdeveloped financial markets makes it a potential ground for an explosive expansion.

Apparently events are validating my earlier observations anew as many stock markets around the world are in the process of consolidation.

One channel is by mergers & acquisitions.

Though much to my dismay, the Australian government recently blocked Singapore’s Stock Exchange (SGX; SIN: S68) takeover bid of the Australia Stock Exchange (ASX:ASX) on absurd nationalist grounds[3].

If the objective is to reduce transaction costs, maximize on the economies of scale, expand market access and supply, and increase market efficiency by globalizing the channels of savings and investments then upholding “national interests” essentially defeats such ideals.

If the ASX rejects SGX out of financial or economic reasons, then there won’t be any opposition from me, but for politicians to pretend to know better of the interests of the stockholders or of the nation represents repression.

Besides, despite the setback, there has been a raft of ongoing mergers in the pipeline.

There has been an ongoing deal for a merger of the New York Stock Exchange (NYSE) with Deutsche Börse of Germany, where U.S.-based Nasdaq OMX Group Inc. and IntercontinentalExchange Inc. have also been waiting on the wings and have been interested to buy into the NYSE[4].

In addition, the London Stock Exchange Group PLC's have also proposed a takeover of TMX Group Inc owner of Toronto Stock Exchange.

And as world markets continue to recover, we should expect mergers & acquisitions deals to pick up steam.


Chart from Allen & Overy[5]

And such deals will include stock market M & A.

Well the integration process doesn’t stop with mergers.

Stock exchanges have also been rushing to push for alliances and collaboration.

One good example is the recent ASEAN deal which promotes the regional equity markets. The aim here is to provide link gateways to the region’s exchanges[6] in line with plan to promote free capital movements within the region, or the 2015 ASEAN Economic Community.

Individual bourses have been in play too.

The London Stock Exchange is likewise reported to be negotiating with Bursa Malaysia for a partnership[7]. Hong Kong has reportedly been open to accept partnerships. And so with Taiwan, who seeks regional alliances via Exchange Traded Funds[8].

And as global stock markets respond to inflationism and financial globalization, we should expect more Initial Public Offerings (IPO) to surge too.


Asia has so far led IPO deals into the recovery.

In the 2011 Global IPO trends outlook, financial services company Ernst & Young observes[9], (chart by Ernst & Young) [bold highlights mine]

In 2011, global IPO markets continue to recover and gain momentum. Global investors seeking to capitalize on the emerging markets growth story have been fueling stock market rallies and new listings world-wide. The lack of exit routes, shortage of capital-raising opportunities, and numerous IPO postponements since 2007 have led to a growing IPO pipeline worldwide. Many key drivers of 2011 global IPO markets reflect a continuation of 2010’s key trends including emerging markets growth, state privatizations, multinational company spin-offs, and fast-growth companies in the energy, industrial, materials and technology sectors.

Despite market volatility exacerbated by the Eurozone sovereign debt crisis, in 2010, global IPO fundraising gradually recovered to pre-crisis levels, buoyed in particular by a record-breaking fourth quarter. In 2010, emerging market issuers, particularly in China, maintained their fundraising leadership, driven by rapid economic growth, market liquidity, and foreign fund inflows.

Again we see a feedback mechanism where rising stock values have fuelled global IPOs and where IPOs tend to magnify gains in global equity markets.

As stock markets continue to advance these should be reflected in IPOs and in mergers & acquisition activities, as well as deals for free capital movement via alliances and other forms of collaboration.

All these simply represent the deepening thrust towards financial globalization.

And it’s quite obvious that the PSE will be a part of this deal making process, as already evidenced by the ASEAN collaboration.

I think more deals will come in the future that should involve the PSE. But all these are anchored upon the whereabouts of the current state of the bubble cycle.

So yes for as long as the boom phase of this cycle persists, I remain mostly bullish on global equity platform providers. And this includes the PSE.

[1] Philippine Stock Exchange: Declaration of 100% Stock Dividends April 13, 2011 AN092-002557

[2] See Unifying Global Stock Markets; Asia Looks Next!, January 14, 2007

[3] Australia rejects Singapore's bid for stock exchange, April 8, 2011

[4] Wall Street Journal Asia, Stock-Exchange Mergers Fan Nationalism, April 15, 2011

[5] Allen & Overy, The Allen & Overy M&A Index Q1 2011

[6] See ASEAN Integration: Regional Stock Exchange Website Launched, April 12, 2011

[7] TAKING STOCK: LSE in scramble for partners as mergers boost competition, April 16, 2011

[8], Taiwan exchange aims alliances, no M&A plans, April 16, 2011

[9] Ernst & Young Global IPO trends 2011

1 comment:

genkumag said...

Excellent post, Senor!