Phisix: Visible Signs of A US Dollar Driven Rally

``However beautiful the strategy, you should occasionally look at the results."-Winston Churchill, ex- Prime Minister and British Statesman (1874-1965)

THE bulls stepped into overdrive as the PHISIX surged for the third consecutive week to expunge ENTIRELY the latest global credit scare triggered losses and to retest its July LIFETIME highs at 3,800.

For the week, Phisix gained a stupendous 5.68% (!), but second only to Indonesia’s 5.99% for a cumulative breathtaking three week winning streak of 13.96%! What a fantastic comeback.

As we have previously discussed, empirical evidences suggests that the today’s captains of the global markets have been the principally fate of the US dollar. In domestic context, such framework applies, as shown in Figure 3….

Figure 3: USD/Peso-Phisix: Reasserting the Correlation

Both the Phisix and the Peso are at decisive junctures. On Friday, the Phisix (black candle) retested its July high at 3,800 and appears to be in the process of reestablishing a new milestone.

On the other hand, the USD/Peso (red line) has successfully broken below its July lows to close at Php 44.75 on Friday.

The chart shows of the negative correlation between the Phisix and the USD/Peso (blue block arrows), where a rising Peso coincides with the strengthening Phisix and vice versa. A caveat is that correlation DOES NOT imply causality.

Our supposition is that aside from monetary policies and trade or remittance flows, the Philippine Peso’s conditions signifies capital flows at the margins, where portfolio flows to Philippine assets meaningfully reflects on the price level of the Peso. The Phisix, being one of the asset classes (fixed income, and real estate), may reflect on such portfolio flows.

For the last two months, however, the said relationship has not been linear. As global markets agonize from the US subprime triggered credit seizure last early August, the Peso and the Phisix fell almost simultaneously, principally on the account of foreign instigated selling.

As you probably noticed, we identified how the Phisix rebounded ferociously and swiftly based on local support. Hence, you’d observe that the Phisix continued its ascent while the Peso struggled.

From September onwards, we observed that the Phisix resumed on its advances with a magnified degree of gains alongside the rise of the Peso. Foreign inflows, however, had NOT been reflected in the Phisix as the month registered a net foreign outflow (3 in 4 weeks!), aside from being relative net sellers (companies which registered foreign inflow-outflow) over the broad market. So, foreign money exchanges could have either seeped through the other assets or got stacked into bank accounts.

As we noted in the past, this has been one of the remarkable “FIRSTs” in the recent cycle, where previously local investors had been seen pushing mainly peripheral issues or on the Phisix issues for only over a relatively limited period of time.

The present recovery revealed of the sustained firepower by the locals, as they directed on the gains of the Phisix or had been responsible for the advance of the “capital intensive” market heavyweights in August through September.

We only saw the reemergence of foreign inflows into the PSE since Friday of last week, and have been inclined to attribute this week’s Phisix’s outperformance to these belated inflows as the US dollar index etched its fresh milestone lows.

Further, we noted in the past of the inherent strength of the local market would come along with the increase in active participations from its constituents. We are already seeing signs of this happening.

As an aside, our long stated notion that Asian money would eventually pour into the region’s capital markets as financial integration deepens combined with a potential realignment of the global capital flows dynamics, in as much as the continued strengthening of the region’s economic linkages.

China’s recent activation of its $200 billion sovereign wealth fund, the China Investment Corp, plus Japan’s potential to do same with Japan Post’s breakup and consequent privatization signifies the idiom of “getting down to the brass tracks” or of getting serious. Combined, these forces, barring any shocks such as resurrected protectionism, would drive the Phisix beyond our 10,000 target in the coming 5 years or so.

For now, the burst of local support has brought about marginal signs of decoupling from the US benchmark as shown in Figure 4.

Figure 4: stockcharts.com: Signs of Decoupling?

As local investors press on to lift the Phisix (candle) from its August lows, we note that the US broadmarket S & P 500 (behind) had been trading sideways, as shown by the circles, to manifest superficial signs of decoupling. Yet, all four benchmarks, the Dow Jones World (topmost) and Dow Jones Asian ex-Japan (lowest window) have been positively correlated.

Our idea is that for as long as the US manages as a soft landing the potential for this soft decoupling on a positive correlation could be maintained. However, if a hard landing occurs the initial reaction could be as destabilizing and almost similar to the July shock except that instead of a short time frame (two months) there could be a potential for a much prolonged torment (possibly a year or more).

Further, because of the lack of objective, comprehensive and in-depth information about valuation based approach to stock market investing, local retail investors have adopted mostly either momentum trading or “event” or “story” based punts which results to a greater number of trades, see figure 5.

Figure 5: Surging Trades Signifies Rise of Speculative Punts

Sellside and technical analysts who proliferate in our industry have heavily contributed to this surge in speculative punts, where little among these practitioners deal with prudent risk management. Only a minority of investors are aware of the cyclical influences of markets relative to the investing exercise of risk-reward trade offs.

Although the rise in the number of trades could serve as a measure for excesses in investor sentiment and signify as a potential tool for market timing, over the long term it would simply be natural to expect the rising trend of number of trades concomitant to an ascending market as investors will intuitively be drawn to winning trends.