The Philippine Peso raced to a 4-year high following a successful breach of the psychological threshold level at 51. The local currency closed 1.26% stronger at 50.735 per US dollar on Friday and was Asia’s best performing currency. Year-to-date, the Peso has firmed by about 4.4%.
Naturally, the strength of the Peso has been likewise reflected in the activities of the local financial markets. As previously shown Philippine sovereign bonds had been imbued with significant portfolio flows as to see its nominal yields decline. Similarly, the local equity market as measured by the Philippine composite index or the Phisix has been on an upswing following last May’s global “risk aversion” scare.
As I have noted in numerous occasions, at the margins it is capital flows to the local financial markets that has lifted the local currency more than the remittances, economic growth and other reasons cited by mainstream experts. And importantly, such flows have been dictated by the developments in the global financial arena. For instance, since the world financial markets has anticipated the US Federal Reserve to hold in abeyance its program of raising interest rates, the US dollar has resumed its secular decline against most Asian currencies and against currencies of its major trading partners.
Let me remind you that in today’s dynamics, the financial realm drive the real economy and not the other way around. You just have to take into account the ocean or seemingly boundless stream of liquidity emanating from monetary and non-monetary sources to support the exchange of widgets and services. In short, I am strictly referring to inflation. While global central banks appear to be in a tightening mode they have been doing it perfunctorily. The humongous build up of aggregate liabilities will require MORE dosages of liquidity injection to support the present framework, otherwise risk a financial system meltdown. Would the world’s political leadership allow this?
Further, you want to talk about a major source of income inequality? Look no further than the inflationary tendencies of the world’s collective monetary authorities. Inflation benefits those who FIRST access the newly issued money who can buy at yesterday’s prices while the late recipients (the public) buys at today’s higher prices. Guess who are the primary beneficiaries of “money created from thin air”? The Government, particularly the Politicians and their executives, and the bankers. For the former, it is of no wonder why they fight with tooth and nail to assume the jurisdiction of, and staunchly justify the Spending Other People’s Money (SOPM). Yet, based on historical accounts not just domestically but worldwide, in a very significant degree, SOPM programs have led to massive distortions and imbalances and has greatly reduced standards of living.
Figure 1: The Phisix (Red) Gets Flanking Support From Strengthening Peso (black)
Back to the world of asset driven growth dynamics, as shown in Figure 1, the incipience of the inverse correlation between the Phisix and the Peso could be seen in the second semester of 2005. As the Peso firmed, local investors had been prompted back to the market on the prospects of higher returns. This again is on the account of lower yields from dollar assets, aside from of course, the declining price value relative to the Peso. Some have commented that chasing yields does not necessarily translate to bullishness. In the financial markets, one earns by buying shares from and selling shares to another. Put differently, everybody is at the mercy of someone else’s expectations and buying power. If one EXPECTS to make money from the market how can one be not bullish? Markets are, after all, a mind game.
Last week’s market internals reveal of a dramatic upsurge in local investor participation as gauged by the number of issues traded. Number of issues traded for me, represents as a quasi-sentiment indicator. The more the issues traded, the bullish the outlook of local investors. As you can see in figure 2, number of issues traded has been on an uptrend since 2003. And this has apparently supported the climb of the Phisix as shown in Chart 1.
Figure 2 Surging Number of issues traded
For the week, number of issues traded hit a level almost similar to May, when the Phisix hit its apogee high of over 2,500. This had been equally supported by a remarkable spike, on the differentials of the advance-decline indicator, which hit a level similar to January’s 2005 peak! In fact, several companies suffering from a dearth of liquidity have shown electrifying performances.
While these frenzied speculative activities on the broad market coincided with major “inflection points” in the past, as in 1st quarter 2005 and May 2006 peaks, I’d like to emphasize that there has been some crucial differences: previous reversals had been externally driven, and the strong peso as sublime impetus for local investors into the market started only during the second semester of 2005. This means that while speculative activities may represent some signs of overconfidence and broadbased recklessness, the paucity of data under similar conditions to suggest of potential patterns makes me uncertain if this development would actually represent another prospective “inflection” point considering the “chase for returns” theme. In other words, different conditions could most likely translate to different outcomes.
In addition, we have not seen the longstanding effects of the rebounding Peso on the Phisix, as the equity benchmark has operated mainly on a tormented legacy of a Peso devaluation since I laid my blessed eyes on this world. In short, while I abhor quoting on this Wall Street phrase, I am compelled to...``This time it is different”. This suggests that if the long-term trend of the peso is to strengthen (which I think it would...out of regional considerations and barring domestic political shocks) then the domestic equity market would essentially be operating under new conditions. So while some patterns may have some subtle pertinence, as a whole the Phisix would be thriving under an undefined landscape. And if initial circumstances where to be utilized as a barometer, the prospective trends look auspicious and supportive of the underpinning market cycles for the Philippine financial markets...again barring any shocks.
Lastly, present market circumstances tell us that global capital flows are the indispensable drivers of the world financial markets. For instance, mainstream media has been emphatic on the prospective US economic growth slowdown; however, the global equity markets appear to twit this on outlook, as shown in Figure 3.
Figure 3 from stockcharts.com: What Slowdown? Dow Jones World Index (left), Dow Jones Industrial Averages (right) 
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