Phisix: Enduring A Global Meltdown, Surviving September

``Whenever you see a successful business, someone once made a courageous decision.”-Peter Drucker

 

In spite of the jitters of a market meltdown, the Phisix alongside Vietnam’s Ho Chi Minh Stock Exchange (+1.4%) and Bangladesh’s Dhaka Stock Exchange (+1.36%) astoundingly outperformed most of the “collapsing” Asian markets. The Philippine benchmark accounted for a positive 1.36% advance over the week. This came in spite of the massive selloffs in the US markets which lost about 3% last Thursday and whose decline reverberated across globe. The Phisix fell by only 1% last Friday to reduce gains acquired early during the week.

 

By the way, among the 7 markets we monitor as possibly forming a bottom as discussed last week in Stock Markets As Indicators Of Recession, 2 are definitely out of the list as Taiwan and Thailand broke support levels while Australia remains in critical support levels. However we will have to add Bangladesh’s Dhaka Stock Exchange whose short term improving technical performance (whose market I glossed over last week) may be a part of team of outliers. Incidentally, New Zealand and India suffered slight losses, down by only .51% and .55% respectively.

 

In the past when the US markets tumbled our Phisix either fell by a proportionate degree or lost greatly more than the decline in US markets. But we have been seeing signposts of growing dissociation. The last time the US benchmarks tumbled by 3% in June 26^th as measured by Dow Jones Industrials, the Phisix lost only 2.2%. Thursday’s hefty 3% loss for the Dow Jones Industrials translated to only 1% loss in the Phisix. So far the Phisix has been behaving against the “recoupling” crowd.

 

Besides one notable action seen in the market internals of the Phisix has been that the greatly reduced degree of losses have been backed by SHARPLY reduced volume as shown in Figure 5.

Figure 5: PSE: Reduced Peso Volume Equals Diminishing Selling Pressures!

 

The bullmarket of 2005 to 2006 haven’t been accompanied by large volumes, which means much of the ascent was “unnoticed”. Peso volume improved only during late 2006 until mid 2007 (green line). As the credit crisis unraveled Peso volume has dramatically fallen along with the recent bear market (red line).

 

Note: it is common to see falling volume in a bear market, as buyers go on a strike. However, a differentiation is that when the scale of market declines substantially eases accompanied by volumes drying up significantly-signifies as diminished degree of selling pressure.

 

Lately we have had two occasions where the market’s Peso volume shriveled to a little over Php 1.1 billion on 2-3 points of decline. The last time the Phisix did the same activity was in September of 2006 which eerily seems to reveal of a similar pattern as today’s; except that the difference is that today’s action seems to be the enlarged version of the 2006 episode as shown in see figure 6.

Figure 6: stockcharts.com: Phisix 2006 Redux? Divergences to Continue?

 

When the Phisix reached its second bottom in September 2006 the Peso volume shrank by same degree (gold arrow in Figure 5), the following months saw the Phisix sprint by over 40%.

 

This is not to suggest that the Phisix will do the same sprint given the global conditions but we can’t write off a material improvement in the Phisix once we survive the seasonal weakness of September, which may imply that we can have a yearend rally barring any shocks.

 

Moreover, the red vertical line shows how the Phisix appears to have departed from its peers, neighbors and the US market. And if such a trend gets reinforced in the coming sessions, local investors, who appear to be driving the Philippine Stock Exchange, might get confident enough to invest more of their sidelined money. Remember, the local participants constitute less than 1% of the population, which means there is much room for participation improvement.

 

As an aside, the prospect of a vastly improving Phisix might yet in itself reverse those foreign fund flows by attracting money from international investors looking for yields enough to offset the forcible liquidation dynamic. For example, the “Mrs. Watanabes” or the housewife currency trader who could be representative of some segment of Japanese savers with a war chest of US $5.04 trillion (New York Times) could be one of our prospective momentum investors.

 

Remember too, that the Philippines is still in a negative real rate environment (statistical “inflation” rate is higher than policy rates, bond yields or economic growth rates) which is why we think that credit growth has been expanding aside from the improvement in the Phisix in the face of slowing “inflation”.

Besides, if US housing will probably bottom by 2010 as shown in Figure 7.

Figure 7: Wall Street Journal: Housing Bottom Still A Year Away

 

Markets, functioning as forward discounting mechanism, usually prices in 6-9 months ahead of the event, suggest that most of the world markets will probably hit the bottom by the first semester of 2009, which gives further boost to our hypothesis that 2010 will see the Phisix take off under the Philippine Presidential cycle.

 

Overall our general message is not for us to run away and hide but to take opportunities to earn from possible seasonal trends aside from positioning for the eventual recovery of global markets possibly in 2009.