Phisix: From Bust to Boom?

``We’re in a government-dependent financial system; I never thought I would live to see the day… We’ve got to fight to get away from that.” Paul Volcker, Volcker: China Chose to Buy Dollars

The Phisix stormed to an 11.25% gain over the past week, and was the second best performer over the adrenaline charged Asian equity markets (although it was mostly global affair), see figure 6.

So far the latest rally has pushed up many major stock markets into the positive zone [see Global Stock Market Performance Update: The Charge of the BRICs] led by the BRICS and many EM economies in contrast to the G-7 economies that have still been drifting in the negative zone but has seen vital improvements in their standings.

Figure 6: Stockcharts.com: Performance Chart of Key Asia Bourses

From January 6^th to Friday’s close, only 4 regional benchmarks have cleared the winner’s zone and this includes China (pink), Taiwan (blue green), Indonesia (orange) and the Philippines (bright light green).

While many commentators have imputed the rising equity markets to “increasing risk appetite”, this needs to be qualified. Relative to global portfolio flows to emerging markets, the meat of the year-to-date inflows have only been accounted for just this week.

According to Marketwatch.com, ``Emerging Market Equity Funds tracked by EPFR Global took in the most money since mid-December during the week ended March 25. These funds absorbed $2.3 billion of inflows during the week, turning year-to-date flows positive by $2.03 billion.”

So nearly 90% of cross border flows came only this week. The current cross border flows signifies as marginal in comparison to size of the composite emerging market bourses. Nonetheless it can be seen as an improvement.

Here at the Philippine Stock Exchange (PSE), capital flows remains a net foreign selling for the end of the week, for the rest of the month and for the year.

This means that the recovery in the Philippine Stock Exchange has largely been a domestic investor affair. This also means that that the recent gains could possibly emanate from the transfer of local savings or possibly increased domestic leverage that could have been channeled into the local equity market. For the advanced EM markets, it could be also be due to short covering.

We can deduce such activities as largely a domestic ‘risk taking’ activity and not from the typical cross border flows.

Besides, given that most central banks have been forcing policy interest rates to approach zero levels or negative real rates regime, coupled with the transmission effects of the QE measures in many major economies the opportunity cost of holding cash have been materially rising.

Put differently, policies from the central banks of the US Federal Reserve and Bangko Sentral ng Pilipinas appear to be gaining traction and skewing people’s incentives to soak up more risk.

And faced with the imminent risk of inflation, staying in cash is now becoming increasingly a risky affair, as a sudden surge in inflation could wipe out the Peso’s purchasing power.

Remember except for the external liabilities of the government, the Philippines’ private sector, as segmented into corporation and individuals, are basically underleveraged. Nearly two fifths of our domestic output can be attributed to the informal economy. Thus, there could be a sizeable surge in private borrowing that may intensify the inflation transmission into the financial asset class. On the other hand, a considerable jump in consumer inflation could also be politically destabilizing.

The initial concerns about the corporate direction of PLDT and the corporate maneuverings at Meralco appear to have been overshadowed by the flush of money from global central banks.

From Bottom To The Advance Phase?

Nonetheless, signs are on the wall that the MONETARY risk environment together with significantly improving market internals seems to be suggesting of an important breakaway for the Phisix from its current “bottoming” cycle to the “advance” cycle.

Figure 6: Daily Traded Issues and Advance Decline Differentials

The Pink line represents the daily traded issues. This is one of the market breadth indicators which deals with the broad market sentiment. A surge in daily traded issues could mean broad based buying specifically when corroborated by an improvement in the advance decline differentials as shown at the same chart. Below is the daily traded issues. The green circle shows of the simultaneous progression.Figure 7: PSE Daily Trades: Another Improving Indicator

Another improving indicator is the number of daily trades. This market breadth indicator also reveals of the risk appetite of investors. A rising incidence of daily trades suggest of more market participants and or more churning activities from existing participants.

It essentially reveals of the market’s sentiment or as confidence barometer. In a bear market, a sudden spurt in daily trades frequently signifies panic selling as in the October-November 2008 experience.

For now, all three indicators are seemingly in synch adrift the resistance levels. And this synchronicity hasn’t been the seen for quite sometime.

Nevertheless, a breakout above the 2,100 level for the Phisix alongside with a breakout for these market internal indicators will indeed be very bullish for the Phisix. Of course, this has to be equally matched by improvements in the market’s overall volume.

As a short reminder, I don’t know when the Phisix will breakout. It could be next week or in the coming weeks or months. Sorry but I am not a seer. What we seem to be seeing is a long awaited improvement in the overall activities within the Philippine Stock Exchange. And if these should continue as I expect it would, then a breakout is more likely sooner than later.

And as stated before, the Phisix can’t rise alone. This means that the regional activities will likewise underpin the success or failure of today’s rally. Although given the conditions stated above, China has so far almost singlehandedly led the rally in the region and seems to have “pulled” many emerging markets along with it. Of course, it’s rather insane to suggest that a $4.22 trillion economy will pull the rest the world (US $14.33 trillion, Eurozone $18.85 trillion or Japan $4.84 trillion).

What we are likely witnessing is the impact from “combined” money printing by global central banks more than an economic recovery. If these measures succeed to buoy most of the region’s economies unimpaired by the credit maelstrom, the “super” inflation could be deferred.

Nonetheless today’s seemingly booming inflationary driven environment will also mean a forthcoming bust in the far end of the road (sometime 2013-2015?). But for now, present risks seem to emanate from a super inflation, than a deflationary bust.