2009: Phisix and Peso Will Advance!

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

Unless one believes that the world is headed for a great depression, then the Phisix is unlikely to head lower.

The Phisix has lost 48.29% over 2008 and has been in a bear market territory for about 17 months in conjunction with global markets. On a peak to trough basis the Phisix have reached losses of about 56% from October 2007 until November 2008. This makes the Philippine benchmark on track with its previous bearmarket cycles over the past 22 years as previously discussed in Phisix: Learning From the Lessons of Financial History.

To give a short account of what we previously discussed the past four bear markets can be divided into two parts see figure 5:

One, a cyclical bearmarket under a secular bull:

1. August 1987 to October 1988- the Phisix lost about 45% and consolidated for 13 months before recovering and resuming another attempt to the upside. The trigger for the bear market in 1987 – ex-Col. Honasan’s August 28^th Black Friday’s botched coup d'état against erstwhile President Cory Aquino.

2. November 1989 to October 1990- the Phisix lost about 62% in about 11 months before convalescing. The trigger for the bear market of 1989 -November 30^th Makati coup again by ex-Col. Honasan…

Figure 5: Phisix: Bear Market cycles

Second, the long term bear market…

3. February 1997 to October 1998-the Phisix lost 66% in about 20 months. But following the election of President Joseph Estrada, the cyclical Presidential honeymoon period led to the Phisix rebound of 120%. This could be interpreted as the cyclical bullmarket within the secular bear market.

4. July 1999 to November 2001- the Phisix lost 62% in about 28 months for the culmination of the secular bear market cycle. Oddly, the Phisix appear to trace the developments in the US markets or when the Nasdaq dot.com bubble imploded in 2000, for a huge chunk of this cycle.

This makes the present bear market losses slightly under the typical 60% depth (characteristic of the cyclical bear) while the duration of 17 months makes it near the secular cycle.

Since foreign participants account heavily or over half of the trading volume in the Philippine stock exchange, it is natural to expect the losses of the Phisix to track global markets on the account of forcible liquidations due to the unraveling US debt deflation.

Remember, the Philippine Stock Exchange have less than 1% of its population invested in it hence the recent financial markets meltdown should have limited impact to household and company net worth, as well as to the national economy.

Yet, most of the damage would likely come from export trade and remittance linkages which constitute about 40% and 11% of the Philippine GDP (by expenditure share) respectively.

Besides, the Balance of Payment standings of the Philippines remain in a marginal surplus, despite the sharp turndown of global trade, coupled with a foreign exchange reserve at near records see figure 6.

Figure 6: yardeni.com: Philippine US Dollar Foreign Currency Reserves

This makes the Philippines less vulnerable to a liquidity crunch aside from being one of the least exposed to the world compared to our ASEAN neighbors.

Besides as we have pointed out, since the Asian Crisis internal balance sheets have been improving see figure 7.Figure 7: IMF Staff Report: Real Private Sector Credit and External indebtedness have been improving

Thus if a boom did NOT happen then a bust will NOT happen, since there have been NO bubble. This could be interpreted as a mixed blessing.

Today’s downturn have been PRINCIPALLY due to the spillover effects overseas and isn’t likely to morph into a rapid deterioration of the economic environment (unless a depression environment occurs) as debt levels have been improving and mostly tailored over a distribution of medium to long term liabilities (right window).

And equally, as the Phisix cratered out of the impact of debt deflation triggered meltdown, the Peso fell 13% in 2008 hamstrung by the compression of liquidity globally, portfolio repatriation and the closure of the global carry trade arbitrages.

Our bet is if the debt deflation phenomenon subsides, even amidst a period of heightened volatility out of global recessionary pressures or even under greater inflation, the Peso and the Phisix are likely to improve year on year with steady acceleration of such advances going into 2010, the Philippine Presidential cycle.