Election Spending A Drag to the Phisix?

``All great deeds and all great thoughts have ridiculous beginnings.” Albert Camus (1913-1960) French philosopher

AS the global equities melt-up continues only two countries in Asia suffered losses last week. Unfortunately so, our Phisix had been one of them down 1.2%, aside from Sri Lanka (-1.32%).

Compared to our neighbors, even Thailand’s SETI which had earlier been trammeled by the recent fiasco on capital controls had broken out of its tight range to climb 3% over the week and surge past the 700 levels, as shown in Figure 1.

Figure 1: stockcharts.com: Lagging Phisix an Election Related Issue?

The center window shows of the bedraggled Phisix (line chart and down blue arrow) against a reanimated SETI (candle and red up arrow). At the above pane is Indonesia’s index represented by the $IDDOW (DJ Indonesia Stock Index) and Malaysia’s $MYDOW (DJ Malaysia Stock Index), all of which are treading on record grounds.

Year to date, among our neighbors Malaysia’s KLSE leads in terms of nominal benchmark returns up 22.82% followed by the Indonesia JKSE (+12.62%), our Phisix (+9.92%) and Thailand’s SETI (+5.38%).

With the Phisix lagging both the US Dow Jones Industrials (as previously discussed) and our neighbors, two nagging questions come to our mind. One, what ails the Phisix? And second will the Phisix eventually join the global shindig or be caught with the corrective headwinds?

We are aware that foreign money had mainly driven the local market since 2003.

For this week, foreign money accounted for 56% of the week’s aggregate turnover. However, foreign money flows shows of a measly net Php 194.25 million worth of inflows compared to the previous week’s Php 1.2 billion. The degree of foreign money inflows have tapered off since the second week of April, ironically even as the US dollar continues to cascade, in terms of its trade weighted index and relative to the Philippine Peso.

Furthermore, this week we observe of some net foreign selling on many index heavyweights, such as Metrobank (-5.51%), Ayala Corp (-3.25%), Ayala Land (-4.11%), Globe (-1.21%) and BPI (-2.29%), as responsible for most of the decline of the Phisix. Based on the market float, the combined weightings of these 5 heavyweights constitute 32.77% of the Phisix as of Friday’s close. But, on the other hand, foreign money inflows remain buoyant over the broader market.

So here we see some mixed signals, foreign selling on select index heavyweights, but supportive of the broad based market.

In addition, we also notice that even as the Phisix has traded sideways since the second week of April, the broad market has been on a bearish bias for the fourth consecutive week, as indicated by MORE declining issues than advancing issues. We construe this as symptoms of bearishness from LOCAL investors.

In other words, over the past four weeks, foreign money remains largely defensively positive (net inflows) with occasional bouts of select selling (as last week) but the locals appear to be the major drag to the Phisix. In fact, repeatedly over the last three trading days, as the Phisix sprinted to over 20 points in gains on the record territory gains of the US Dow Jones, mid session selling dampened the trading sentiment to end the day’s session mixed. This ambivalence leads us to suspect that despite the sanguine micro environment and “bullish” global backdrop, the extent of local selling could be ELECTION related.

No, we don’t think this is about election jitters. Instead we suspect this to be about election spending. The Philippine Stock Exchange (PSE) could have been utilized as conduit, directly or indirectly (mutual funds, UITFs), for fund raising activities in the upcoming elections.

Since the PSE’s payout procedure is Transaction + 3 days, going by this line of reasoning, we expect the “election fund raising” dynamics to culminate by Tuesday as the elections are scheduled for next Monday, May 14^th.

And if our analysis is accurate, then we should see a sentiment reversal, possibly as early as the latter half of the coming week or after the elections. Of course, this would all depend on the prevailing global sentiment then.

So in answer to the two questions we earlier posed, we think that the divergences or the underperformance of the Phisix relative to its neighbors and the US Dow Jones Industrials, as possibly due to Election spending related and the probability is that as global markets remain buoyant, the likelihood is that the Phisix should regain its footing.

Stay Long the Phisix and the Peso.