Phisix Crashes into the Bear Market’s Lair, Risk of ASEAN’s Sudden Stop Rises, Will the 1997 Crash Rhyme?

In this issue

Phisix Crashes into the Bear Market’s Lair, Risk of ASEAN’s Sudden Stop Rises, Will the 1997 Crash Rhyme?

-Asian Crisis 2.0 Watch: Asian Equities Lost More Than $1.6 Trillion in 2 Weeks; Risk of Sudden Stops Rises

-Trivia: The 10 Sharpest Weekly PSEi Declines Since 2007

-Will History Rhyme? Is the 2018 Bear Market a Reprise of 1997?

-Record Market Internals: Unanimous Selling, Lopsided Spread Favoring Sellers, Sy Group Adds More PSEi Market Cap Share

Phisix Crashes into the Bear Market’s Lair, Risk of ASEAN’s Sudden Stop Rises, Will the 1997 Crash Rhyme?

Asian Crisis 2.0 Watch: Asian Equities Lost More Than $1.6 Trillion in 2 Weeks; Risk of Sudden Stops Rises

According to a Bloomberg article, in the past two weeks, more than three-fourths or more than $1.6 trillion of the $2.1 trillion lost in stock values worldwide came from Asia. Though the article stated that China led the risk aversion, this week, the Philippine equity benchmark joined the Vietnamese counterpart into a bear market, with China’s bellwether just a hair away.

Outside China (-4.37%), Pakistan (-4.68%) and Hong Kong (-3.2%), however, ASEAN national bellwethers retreated most led by the Philippine PSEi (-6.2%), Thai SET (-4.1%), Malaysian KLSE (-3.84%) and Vietnam’s VN (-3.28%).

Only 4 of the 19 equity indices in the region or 21% scored weekly gains. In the meantime, the region tallied a return of -2.1%

Perhaps, the recent rally of the USD-CNY (+1.04%) may be highlighting strains from the region’s offshore US dollar (Eurodollar) conditions.

Given the vast exposure in US dollar liabilities of the region, a scramble for access to US dollar holdings required to finance these claims could lead to liquidations of “carry trade” or “cross currency arbitrage” positions.

The interesting part has been the intense selling pressures of ASEAN assets

I can’t say why ASEAN has been bearing the brunt, though I can only suspect of fragilities in their exposure to US dollar claims

Besides internal conditions matter. The more fragile the economy is, the greater the potential dislocations.

And systematic liquidations in the region amplifies the risks of a sudden stop 

A sudden stop, according to the Investopedia, is characterized by swift reversals of international capital flows triggered either by foreign investors, when they reduce or stop capital inflows into an economy, and/or by domestic residents when they pull their money out of the domestic economy. These would lead to declines in production and consumption, and corrections in asset prices. Since sudden stops are generally preceded by robust expansions that drive asset prices significantly higher, their occurrence can have a very adverse impact on the economy and tip it into a recession. A sudden stop may also be accompanied by a currency crisis or a banking crisis or both.

When the taper tantrum emerged in 2013, Malaysian financial assets had been unscathed by the selloff. In the current setting, virtually all ASEAN nations have exhibited symptoms of liquidations.  Not only stocks; but liquidations have involved the region’s bond markets as well.

A US-China or a global trade war will likely magnify the region's internal and external vulnerabilities

Current events reek of the Asian crisis 2.0

Trivia: The 10 Sharpest Weekly PSEi Declines Since 2007

The Philippine equity benchmark suffered its biggest weekly decline of 6.19% since June 2013

 

Though sharp downside actions typically highlight market stress, there has hardly been a definite pattern to indicate future activities.

Steep deficits have occurred in different phases of the market: tops, bottoms or just part of the major trend.

Since 2007, the three largest weekly crashes in the Phisix occurred during the selling climax in the 4Q of 2008 in the wake of the Lehman bankruptcy. 

A big selloff also occurred in June 2008 before the final liquidation phase.

Two huge downdrafts transpired in 2007, which embodied a market top that presaged the 2008 crash.

June 2009’s 7.72% came in response to dramatic rally following the 2008 bottom.

Last week’s 6.19% retreat was second only to the largest in 5 years or in June 2013’s 6.86%.

June appears to be the favorite month for the steepest weekly downside moves. That’s because four of the ten, including last week, occurred in that month.

Also, five or half of these events occurred in bear markets. Four marked the bottom. Most of the "don’t sell now, buy soon" blarney has been premised on free lunch “bounce back” forever.

Of course, statistics don’t reveal the unique drivers of such ten biggest downside swings

Will History Rhyme? Is the 2018 Bear Market a Reprise of 1997?

I am a believer of cycles: stock market, economic, credit, inflation, and business cycles.

Because people hardly ever learn from previous mistakes, they keep repeating them

In the current stock market cycle, the PSEi has had three bear and a quasi-bear market

Last week’s bear market has tied 2013’s % performance.

The biggest bear market occurred in 2015 to early 2016 which posted a deficit of 25.14%

Again circumstances behind these bear markets have been unique.

Under the present conditions, the incumbent policy rate, after BSP’s 2nd hike last week, remains at 2014 levels, still a record low.

Reserve Requirements have also been eased twice in 2018 (February and May). The BSP’s monetization of debt levels has been at a historic high. Fiscal stimulus, embodied by the aggressive deficit spending, has also been at unprecedented levels.

These policy factors are EXCLUSIVE to the current environment.

The point being, the 2018 bear market has occurred under a financial environment pillared by unparalleled monetary and unprecedented fiscal stimulus. Yes, in spite of these emergency measures the bear market has re-surfaced. In the context of inflationary policies, this time is indeed different!

Unlike the last bear market episodes, the BSP and the NG must have already spent or exhausted all of their possible policy toolkits to rescue the markets and the economy.

I could be wrong, of course. But in my view, central banks know only of one thing. Print. Print. Print.

So the 2018 bear market should be very interesting.

I carry the suspicion that the current bear market could mark the final throes of this secular cycle which began in 2003.

2018 seem to resonate with 1997.

In 2018, the BSP’s easy money regime has backfired. Rising rates and the falling peso amidst raging inflation, which has fueled a backlash against the administration’s tax policies, have been exuded signs of its end.

And because the epoch of easy money is over, support for domestic risk assets has lost its moorings. And with the economy structured upon expectations of the infinitude of a free money regime, rising rates will likely cause disorderly disruptions.

Even the PSEi chart seems to conform to this view.

The 2012-2018 trend line, which had been set by the lows of 2015 and 2016 bear markets, was decisively broken by last week’s significant retracements. Novelist Ernest Hemingway said that there are two ways to go bankrupt; gradually then suddenly.

With the Phisix down by a stunning 8.92% in two weeks, a natural reaction from this should be a substantial rally sometime soon (perhaps this week).  

The critical question is: will the rebound be sufficient enough to repair the major technical damage caused from last week’s decline? If not, then like in 1997, a failed rally will mean “look out below” (Phisix 3,000-3,500)!

The 2012-2018 trend line breach reverberates with the definitive violation of the 1993 to 1997 trend line.

In the 1993-1997 topping cycle, there were three bear markets and a quasi-bear market.

Aside from the extra bear market, the successful breakout from the most recent highs is what distinguishes the present cycle. Of course, this had been made possible only by brazen manipulations.

With rising rates on fixed income products providing competition to expensively priced risk assets, the windows for access to funds for “marking the close” would be limited. Moreover, if banks are indeed suffering from internal liquidity pressures, there should be reduced funds available for such activities directly or indirectly.

In 1997, after peaking in February, the Phisix dived by 27.5% until May. It rallied furiously to break above the 1993-1997 trend line. However, the trend break failed, and the Phisix collapsed by 68% from February 1997 to September 1998.

In the current environment, the Phisix climaxed at the end of January and crashed through the 2012-2018 trend line last week.

The next rally, based on the trend line, would constitute an all-important factor.

Remember, although domestic factors are important, these aren’t everything. Selling pressures in China and on the ASEAN region will also be a crucial factor.

Record Market Internals: Unanimous Selling, Lopsided Spread Favoring Sellers, Sy Group Adds More PSEi Market Cap Share

The PSEi’s bear market entry comes also with some unique market internal traits

Not only was the retrenchment unanimous for all 30 PSEi members; a possible record-tying phenomenon occurred in the advance-decline spread in the broader markets.

The dominance of decliners via an enormous 366 spread equaled January 8th, 2016 which registered a 5.42% weekly decline. The lopsidedness in favor of the sellers essentially paved the way for the presidential election rally of 2016.

The Phisix has been down by 22%. But what has been striking: the Sy group’s market cap share of the index has reached an incredible 29.7% last Friday!

Yes, three Sy owned companies control a third of the index!!!

How did this come about?  Despite the meltdown, the Sy companies have significantly outperformed its peers. If ALI and AC are added, their market cap share expands to a staggering 44.9% - a fresh record!!! Yes, 5 companies have accounted for nearly HALF of the index performance! And yet, the benchmark has been popularly perceived as representative of the 30 issues.

So the 22% decline entails remarkable selling pressures on most issues outside the top 5!

Once the selling pressure eases on the broader market, the top 5 should lead the recovery. That is the hope from the unbridled impudent manipulations of the index.

Nevertheless, this is emblematic of the intensifying concentration risks at the PSEi.

These top 5 issues have been painted as impervious or even immune to adverse fundamental developments. In reality, these firms have attained their status as beneficiaries of price fixing, mostly on the SM group.  Yet, among their contemporaries, these firms are the biggest debtors.  

Once the said firms suffer from a fundamental shock, support for these overpriced shares will vanish.

The downside burden will rotate from outside the top 5 to the top 5.

Thus the bear market will be reinforced.