Amidst all the external tumult, the Philippine stock market has amazingly defied the convention and continues to climb to new record highs. Because of this, many have come to believe of a ‘miracle’.
Yet the contagion from a global slowdown seems as being transmitted through deteriorating “liquidity” conditions in Emerging Markets which could pose as spoiler to the Phisix shindig.
Here are two views on the increasing risks of contagion through the “liquidity” channels
Canadian independent research outfit, the BCA Research seems bearish Emerging Market Stocks:
Recent data shows that the trade balance in emerging markets has continued deteriorating, a phenomenon that typically entails lower share prices. Falling commodity prices will support this negative trend for many EM countries.
One of the implications is that developing nations foreign reserves accumulation has slowed dramatically. In a number of countries, foreign reserves have in fact been depleted in the past year as authorities have sold international reserves to support their currencies, which, in turn, has squeezed domestic currency liquidity.
Additionally, liquidity will be squeezed as capital inflows to both resource-producing and commodity-importing EM countries deteriorate. FDI inflows into EM have topped out and based on M&A activities, are set to fall drastically this year.
More troublesome news from Zero Hedge (bold cap and underline are original)
The growth in Emerging Market 'External Liquidity' recently was only ever slower in the quarters either side of the crash in 2008. This is a very worrying sign. EM nations are highly dependent on 'external' capital inflows (to smooth current account deficits) and have empirically been exposed to the 'sudden stop' nature of these inflows. It appears that Europe's banking crisis and deleveraging is indeed having a critical impact on EM nations - which may oddly mean domestic policy adjustments will be necessary (raising rates to encourage capital inflows) that will further exacerbate the problems as global growth slows. This brings to mind our recent comments on the shadow banking system and the drop in deposits among traditional risk-hungry EM funding banks - as we note that the more deposit-free the banking system, the slower the funds will flow. The newer the debt- and asset-inflation-based 'capitalism', the faster it is impacted at the margin - and it appears many EM nations are being affected rather rapidly.
Both seem to be singing the same song.
For as long as central bankers of developed economies continue to dilly dally on the policy directions and for as long political deadlock remains, the risk of an escalation of these downdraft grows.
Will the Phisix continue to defy the world? I can't say.
For how long will hope prevail over reality?
Be careful out there.
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