Prospective Philippine Stock Market 'Decoupling' Due To "Economic Success"?

One suggestion is that a "decoupling" of the Philippine assets with the US is likely for reasons of relative "economic success".

I doubt the cogency of this premise, for the simple reason that the rigidities from the current political economic structure has been rendering the Philippines as "less competitive", which equally translates to a high "hurdle rate" for investors.

The table from CATO.org, reveals that economic freedom has lagged or has marginally regressed in 2007 compared to the earlier years.

And worst, the Philippines ranked in the bottom half among 141 nations in the CATO study, particularly on the aspects of Legal Structure & Security of Property Rights (91th) and Regulation of Credit, Labor, and Business (102nd).

Where property rights isn't secured, the risk premium is high. That's because investment returns may be subject to political appropriation.

And the labyrinth of regulations similarly translates to high transaction and business costs.

So rigidities from an "unfree" economy results to a big informal or shadow economy and the inefficiency of wealth distribution which are mostly skewed towards the minority who operate in the ambit of the political class. This called crony capitalism.

And according to the following charts from CATO, economic freedom has been strongly correlated with.....

economic growth and

per capita income

Yet one should not mistaken rising stock markets as signs of "economic success". That's because equities may rise even if the economy slumps or is in a recession, as in the recent case of Hungary or Venezuela which was discussed earlier. Or as in the case of Zimbabwe in 2008 or in Weimar Germany in the early 1920s.

The reason is that equity prices in such instances were driven MAINLY by inflation. Equity assets, thereby, assimilate the function of money's "store of value" as governments ravage by stealth society's wealth by debasing currency's purchasing power during these circumstances.

As spelled out in my last post "Why The Philippine Phisix Will Climb The Global Wall Of Worries", decoupling is a relative term.

Barring another bout of liquidity seizure from a banking crisis elsewhere, the reason the Philippines (as well as major ASEAN economies) have been manifesting signs of partial decoupling is that the local markets and the economy seem to be more receptive to current globally coordinated "inflationist" policies.

Relative to globalization, the lack of depth in global integration appears to amplify local developments, which overshadows international events, since the country's shortcomings have turned into "blessings" by virtue of being less to susceptible to extraneous shocks.

So we may be witnessing the ramifications of inflationist policies overwhelming developments abroad where relative liquidity is proving more beneficial to the domestic asset class.

Although as we have earlier pointed out the ASEAN Free Trade Agreement along with China and major Asian nations should help bolster economic reforms and increase the breadth of market activities that should be beneficial to the Philippine economy in the long run. Again this is a medium to long term proposition and will depend on the new adminstration's willingness to abide by the pact.

Moreover, another prospect for a decoupling to occur is when Americans become ostensibly cognizant of inflationist policies that would send their local investors scampering for a safehaven outside their currency. But that has hardly been the case today yet. There is indeed a debt problem in the US (chart below from Bloomberg), but prospective policies will determine the outcome.

In short, this is an ex-ante proposition. Therefore the outcome hasn't been fixed.

Besides, what happens in this scenario is merely a transference of one bubble to another, which hardly makes the case for a sound paradigm of "economic success".

Japan, for instance, was deemed as an "economic success" story in the early 80s, until the illusion from inflationism was popped which only revealed the false sense of prosperity.

Major ASEAN nations also benefited from the bust in Japan's bubble as Japanese money reportedly sought returns in ASEAN assets, which was accommodated by loose policies in the region as well as abroad. The boom eventually imploded in 1997, popularly known as the Asian Crisis.

In sum: Economic success comes with more economic freedom. Inflationism doesn't exhibit signs of a sound and sustainable economic growth. Stock market activities don't necessarily reflect on the health of the economy. And economic development will depend on the prospective direction of policies.

Thus, the assumption that the Philippines will diverge from the US based on relative economic performance could be seen more from an angle of endowment effect- "where people place a higher value on objects they own than objects that they do not" or a form of cognitive bias rather than an objective assessment.