``The key to making money in stocks is not to get scared out of them."-Peter Lynch
If there are any lessons learned from the events of last week, it is what we have earlier observed: markets are mostly externally driven and alternatively local ‘political’ activities have less an impact.
And as previously noted[1], ``So I am not as confident of a decoupling until we see more elaborate evidences from this.”
As long as politics revolve around non-financial or market issues, they will likely have lesser influence than from developments in capital markets abroad.
So whether it is political tumult in Thailand where headlines scream “Bangkok Burns”[2] or from the recent electoral finis in the Philippines, it’s been little about local events.
Proof? (see figure 2)
Figure 2: Global Market Rout Spillover To The Phisix And The Peso
When local analysts and media babble about election failure jitters, and where the Peso continues to firm, that would seem like foisting one’s desired opinion as the aura of truth, even in the absence of evidences. This essentially begs the question. It is like observing in a horse race where horse X is ahead of horse Y even if in reality Y is way ahead of X with only a foot away from the tape.
Following the elections everyone seems optimistic about markets due to a change in leadership. In contrast, our upbeatness on the domestic markets emanate from different reasons.
Yet market reaction and political developments appear to be diverging.
Currency Markets Bears The Brunt As The Phisix Remains Resilient
The market rout in the Europe and Chinese markets appears as being transmitted into sundry market channels, most notably through the currency markets.
This week alone, the Philippine Peso fell by a whopping 3.8% (green line in the chart), which seems like a prayer answered to a local exporting group, whom has been calling for a 46 to a US dollar level!
Unfortunately for this myopic exporting group, if markets continue to stumble as reflected on the falling Peso, a lower peso won’t translate to ‘better business’ or added demand simply because markets appear to be suggesting exactly the opposite--a prospective fall in demand, hence reflected on the fall in the Peso.
In short, this may be called as the return of risk aversion—for the moment.
Mainstream must be wondering, with a newly elected “People Power” president why the sudden stampede away from the Peso? The answer is that elections have had little influence on the markets.
Yet this isn’t just a Peso phenomenon. Asian’s currencies were mostly in a swan dive; the Korean won crashed by 8.6%, the Malaysian ringgit 4%, New Zealand dollar and the Australian Dollar 4% and 6% respectively. And only the Thai baht seemed little changed this week in spite of the Bangkok burning event.
As you can see above, the S&P 500 (blue line) plummeted by 4.23% this week after the ugly plunge 3.8% last Thursday. From a peak to trough basis the S&P has lost some 10.7% based on Friday’s close.
Meanwhile, the Philippine Phisix lost 4.54% over the week. One peculiar behaviour has been that the Phisix fell by only 1% in reaction to the hefty over 3.5% decline in the US, last Thursday. Moreover, the Phisix is down 4.54%, following a newly established high or zenith the other week. This compared to the 10% decline, from the peak in the US markets, last end of April.
While one week doesn’t a trend make, the seeming resiliency seen in the local market relative to the Phisix can be traced to a shift in dominance in terms of transactions from foreign to the locals. This has been the case since 2009 (see figure 3)
Figure 3: PSE: % Share Of Foreign Trade
The red line marks the 50% threshold. In 2008, most transactions have been dominated by foreigners, this changed in 2009 where most transactions have been shown below the trend line.
So while we don’t believe that there will be a decoupling yet, continued marked improvements like this could function as a foundation.
Nevertheless, this implies that the state of international markets remain as key factors in ascertaining local trends or even individual local issues.
The idea that corporate fundamentals will defy general trends seems like a misconception. Even the deeper and more sophisticated US markets seem to be showing the same symptoms[3], where tidal fluxes shape psychology and affect individual issues which eventually determines the general state of the markets.
So unless we can establish that global markets are not headed for a free fall, only from then can we work on the significance of micro dynamics.
[1] See Phisix: The Philippine Presidential Honeymoon Cycle Is On
[2] See Politics And Markets: Bangkok Burns Edition
[3] See More Evidence On Liquidity Driven Markets
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