Philippine Stock Exchange: Supported by Global M & A, Secular Trends and Capital Market Developments

``If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue -- relatively, at least -- companies that are out of favor because of unsatisfactory developments of a temporary nature." - Ben Graham (1984-1976), mentor of Warren Buffett

In our January 8 to January 12 edition, [see Unifying Global Stock Markets; Asia Looks Next!] we wrote how global exchanges had been undergoing consolidation trends, and that the deepening financial integration appears to bolster these developments.

Here we concluded, ``Today, the Philippine Stock Exchange, despite its miniscule capitalization and traded volume relative to global standards or its peers, will be an inescapable part of the ongoing global trends to unify financial market exchanges, such that in the future it will a party to any potential alliances, or consolidations by mergers or acquisitions, as well as, take into account the realization of cross-border listings, after progress on regulatory hurdles would have been met and expanding trading facilities to possibly include other asset markets.”

Recently the London Stock Exchange (LSE) has been the object of interest for acquisition where the Qatar Investment Authority (QIA) acquired 20% of the company while United Arab Emirates’s Borse Dubai in a complex deal with the Nasdaq took over the latter’s stake at LSE to hold an accrued 28% in Europe’s oldest stock exchange in return for Nasdaq’s takeover of the Norway’s Nordic OMX, where the Borse Dubai will also own a significant 19.99% stake.

In Asia, Tokyo Stock Exchange (TSE) in an effort to increase alliances and expand operations recently acquired 5% of the listed Singapore Stock Exchange.

There have also been rumors floating that the Chicago Mercantile Exchange (CME) is interested to acquire substantial positions in the Singapore Bourse Operator, as well as other exchanges around the world.

In short, our thesis that the consolidation trends in global stock exchanges will probably deepen has shown more signs of being validated.

What has this got to do with PSE?

We rarely deal with particular issues but since the PSE is the country’s sole service platform facility for the trading of Philippine equities, or a monopoly at that, we view the PSE as the EMBODIMENT of the Phisix. In short, what happens to the Philippine Stock Exchange will influence the trading activities in the Phisix.

Over the past week, the demutualized Philippine Stock Exchange (PSE) surged 22% to close at 1,005 and is up 258% from the start of the year. It also recorded hefty foreign buying.

While it is speculation on our part that the foreign activities today in the PSE could be part of these global consolidation process, we believe that either this is starting to happen or will become an inevitable part of the financial markets evolution.

Of course, the PSE’s rise could also signify the attendant breakout of the Phisix which recently carve out its NEW highs since the PSE came into existence.

In other words, if you share my view that the Phisix’s long term or secular tend will reach at least 10,000 in the next 5 years, then the PSE is a no brainer, since a rising Phisix will command higher volumes, more fees, more IPOs and an expanded business frontier.

Further with present thrust of our country to continually develop our capital markets, major future projects are lined up for the PSE, such as the proposed incorporation of derivatives trading, the present inclusion of several Phisix member companies in the ASEAN ETF traded in Singapore’s Exchange which could pave way for the future trading of Exchange Traded Funds, the recent introduction of the Securities Borrowing and Lending (SBL), and the prospective cross border listing or listing of shares of a foreign publicly listed company in the Philippine exchange.

Where such capital market enhancements provide investors alternative options and instruments to spread and hedge risks and as well as aim for expanded returns, one can expect the sophistication of asset management to attract significantly more investors in our underappreciated capital markets.

Figure 6 and 7 shows of how PSE’s contemporaries have performed over the past 5 years…

Figure 6: Yahoo.com: Bursa Malaysia and HK Stock Exchange

Having been a dull “lack of story” stock, we never expected an outperformance from the exchange issues, which implies PSE is not a stock for everyone, until now…

But so far exchanges have provided investors with magnificent returns as shown by our neighbors the Bursa Malaysia (left) has jumped 2.5 times since its listing in 2005, while Hong Kong Stock Exchange (right) flew by an astounding 40 TIMES since 2001!

Figure 7: Yahoo.com: Singapore Exchange and Australian Stock Exchange

On the other hand, Singapore Stock Exchange (left) has returned about 5.5 times for its investors over the past 5 years, while the Australian Stock Exchange (right) has yielded about 4.4 times for investors over the same period.

To recap, secular advancing trends for the Phisix, capital markets development and the ongoing mergers and consolidation trends in global markets merits that the PSE be a part of one’s long term portfolio.

While this is not to recommendation for a buy today, a thawing from its recent sizzling performance could provide an entry point.

Important Disclosure: The undersigned owns shares of PSE.