The Philippine Peso And The Phisix: With A Little Help From Our Neighbors

``Any currency is both a means of payment and a store of value. So when you try to determine what it's worth, you have to consider both what it can buy in terms of goods, and what it can earn if you hold it as an asset. An exchange rate is just the price of a currency. So a given foreign currency might be quoted as so many dollars per unit ($/FC).”-Dr. John Hussman

The Philippine equity benchmark fell 2.64% for the first time in 5 weeks following a massive 17% rally during the previous four. The much needed correction came amidst regional sluggishness and importantly drifted “independently” from the pendulum swings of the US markets.

Of course technical factors have weighed in on last week’s activities as the Phisix had been in overbought conditions following four furious weeks of rallies. So the recent actions could have somewhat diminished the profit selling pressures.

Fundamentally, some suggested that the ongoing military action in Mindanao has helped depressed sentiment, we don’t share that view.

While the military action in Mindanao is inflationary and won’t help the cause of the Philippine Peso as discussed in Toynbee’s Generational War Cycle: In Mindanao or In Georgia/South Ossetia?, because war spending will add pressures on our fiscal balance sheets and cause undue burden to the Peso, which fell anew by .75% to 45.65 to a US dollar, the operation has been largely isolated. But then again this war-related Peso loss shouldn’t be seen from the prospects of the Philippine currency alone. The US dollar is itself very much belabored from the strains from its financial markets and the economy.

Nonetheless what needs to be shown is that the present actions in the currency front seem to reflect regional actions as shown in Figure 7.Figure 7: finance.yahoo.com: Malaysian Ringgit and Taiwan Dollar

Including the Chinese Yuan, the US dollar has risen against Asian currencies. On the left is the Malaysian Ringgit and on the right is the Taiwan Dollar. My intent is to show the representativeness of the region’s currency activities from both the Southeast and East Asian economies. Even in South Asia, India and Pakistan have shown similar US dollar rally patterns.

Again a lot of this has been predicated on the US dollar as safehaven status over the prospects of a severe slowdown as tackled above. Others insist that it is about economic growth which should eventually be shown as unfounded especially when compared to the region’s potentials. For us, it’s been either a scare story that has been peddled in the financial markets or a “momentum trade” that has largely been bought into by financial institutions.

The odd thing is that the supposed impact from the scare stories have not yet caused a meltdown where it is due but instead impelled some volatility in external markets.

While the momentum trade is a function of a cognitive bias called survivorship bias- people tend to look at the “winners” or survivors and pile into them and ignore the rest, thereby skewing any analysis.

The important point to address is that relative to the equity markets, it is hard to see an immediate transition to an advance phase from the present “bottom” phase of the Phisix without some signs that part of the region could be improving.

In short, it is going to be difficult, but not improbable, to have the Phisix transition into a bullmarket or advance phase alone see figure 8.

Figure 8: Bloomberg: Select Asian Equities: The Phisix Seems Not Alone!

All of Asian markets have suffered from the recent bear market cycle (measured from 20% fall from the peak). But as shown in figure 8, while 3 national bellwethers (China-green, Phisix-dark orange, Vietnam blue) turned lower almost synchronically (but Vietnam fell first!), Indonesia (yellow) has had a “asynchronous” or lagged impact.

Noticeably too, based on a one year period, the performance (or returns) of Indonesia could be assessed as only slightly negative compared to the Phisix, China or Vietnam. Such disparities give us further room to question the validity of the religion like “recoupling” dogma.

The most important and encouraging observation now is that following the most recent crash, Vietnam (blue) appears to have hurdled its first bump-where it broke its previous resistance-and can be construed as in an upward momentum.

Meanwhile, the Phisix, which turned lower almost at the same time with China last October, appears to have followed pace of Vietnam (albeit belatedly) but has yet to breakout from its recent high.

Of course, bear markets can always lead to false dawns. But as we pointed out, the Phisix is likely to be in a bottom considering the cyclical nature of the recent decline. Besides, a global contagion is most likely to force a consolidation than see a outright collapse unless those “end tails” become a reality as discussed last week.

We don’t know much about Vietnam except for the fact that market seems to signal either previous excessive selling or a prospective economic recovery.

According to Deyi Tan and Chetan Ahya of Morgan Stanley, ``The aggressive tightening undertaken by the State Bank of Vietnam (SBV), hiking the base rate from 8.75% in May to 14% in June, has had an effect on Vietnam’s macro environment. Coupled with declining commodity prices and administrative measures, indicators are showing signs of cooling off. This has increased the markets’ hopes for a meaningful cut in banks’ lending rates over the next 3-4 months.”

So the tapering off of inflation expectations aside from a slowdown in economic growth seems to be shaping expectations for a possible monetary easing and could be instrumental in boosting Vietnam’s market or the Ho Chi Minh Index from the recent nadir.

But such prospective policy actions could be limited since Vietnam still is in negative real rates and risks stoking future headline inflation.

For now we will observe if the Phisix-Vietnam tandem will be successful in their distinct attempts to move higher and if they can help influence other regional bellwethers such as Indonesia or Thailand. With a little nudge from our neighbors we might get the much needed momentum into moving forward.