Small Pockets of Real Estate Opportunities, Smashing the 7,000 Hurdle, The Proposal to Quasi-Centralize the PSE

 

Unlike in decentralized markets, if the Big Plans are flawed — either in design or in execution — there’s no offsetting, competitive alternative. Everyone is along for the dangerous ride. All eggs are in the same big basket—Donald J. Boudreaux 

 

In this short issue 

 

Small Pockets of Real Estate Opportunities, Smashing the 7,000 Hurdle, The Proposal to Quasi-Centralize the PSE 

1. Real Estate Industry: Small Pockets of Opportunities 

2. PSYEi 30: Smashing the 7,000 Hurdle 

3. The Proposal to Quasi-Centralize the PSE 

 

Small Pockets of Real Estate Opportunities, Smashing the 7,000 Hurdle, The Proposal to Quasi-Centralize the PSE 

1. Real Estate Industry: Small Pockets of Opportunities 

 

There are two things that I missed or omitted from last week’s discourse on the prospects of the domestic real estate industry. 

 

First, the pandemic has brought about possible considerable consumer changes in the industry.  

 

As noted elsewhere in the past, even the BSP said that eCommerce could take on a more significant role in the retail sector, amplifying the overspending and oversupply risks from brick-and-mortar shopping malls. 

 

How about this as a prospective global trendsetter? From Channel News Asia (July 1): US apparel company Gap will close its 81 stores in Britain and Ireland by September but remain online there as it becomes a "digital first business", the retailer said Thursday (Jul 1). Gap also said it had potential buyers for its outlets in France and Italy. The move comes as the coronavirus pandemic and lockdowns have pummelled brick-and-mortar businesses while giving a boost to online shopping. "In the United Kingdom and Europe, we are going to maintain our Gap online business," Gap said in a statement. "The e-commerce business continues to grow and we want to meet our customers where they are shopping," it said, adding: "We're becoming a digital first business." 

 

Should a critical number of retailers migrate to the digital economy while opting to substantially reduce demand for physical space, to what degree would this impact the shopping mall industry?  

 

Of course, the shopping mall industry is not about to evaporate. But a critical makeover in the sector is likely to magnify several risks for the industry.  

 

Another, even when COVID-19 fades, the shift towards remote work or telecommuting may also magnify the overspending and oversupply risks of office spaces.  

 

The much-touted BPOs are unlikely to cover the supply-demand imbalance given its growth downtrend. BPOs are also looking at assimilating or integrating remote work into their operations.  Home offices or workplaces are likely to increase instead.  

 

Under the same remote-work theme, some demand for residences may also move away from the pricier metropolis and urban areas to suburban areas or even to select rural leisure spots.  

 

Likewise, deflating demand in conventional real estate may translate to a repositioning of investments towards agriculture/resource rich and industry or manufacturing-logistics properties, sectors that suffered from severe underspending during the BSP-sponsored boom. 

 

Second and lastly, despite the enormous bubble, looking forward, there are pockets of potential value in the real estate industry, namely, agriculture/resource-rich, industry or manufacturing-logistics, and possibly select tourism/leisure spots in rural areas. 

 

As a reminder, in the light of the current interventions from the National Government and the BSP, especially on their implicit encouragement of asset pumping, such propositions will likely find value once this erstwhile credit-fueled boom (malinvestments) morphs into a bust.  

 

For patient entities with a stash of liquidity, such conditions will also be an opportune time for vulture capitalists. The fire sales from the coming waves of defaults are likely to create massive opportunities in a strictly buyer’s market.  

 

Figure 1 

Finally, the diminishing share of the sector’s GDP is also conspicuous on an annual basis. Again, the downtrend of the real estate GDP and its share of the National GDP existed way before the pandemic. And the pandemic only accelerated it. 

 

2. PSYEi 30: Smashing the 7,000 Hurdle 

 

Figure 2 

 

From an Inquirer Headline (July 3): PSEi finally smashes 7,000 hurdle in best performance in 4 months 

 

Unlike the USD-Php, which broke into fresh grounds accompanied by heavy volume and pulled away from the resistance levels, it’s a different story for the PSEi, which posted a .74% gain this week, the fifth in six weeks.   

  

True, the headline index slightly breached its resistance to hit the 7,000-level.  But it came on low volume and from another timely and fantastic pre-close pump on Friday.  

 

Instead of market spontaneity, prices are pre-determined at the close to attain certain levels by organized interest groups.  Talk about attaining price efficiency. 

  

Yes, the total weekly volume jumped 20%, but that’s because 23.4% of it came from special block sales. The weekly main board volume was up by only 4.5%. Since the February climax, the weekly board volume has substantially emaciated.  

 

On the other hand, even as the index climbed, the divergence in the market internals has become noticeable.   

 

The advantage of advancing issues over declining issues continue to erode.  

 

Meanwhile, the participation of retail players remained circumscribed as sentiment indicators, such as traded issues and the number of trades, remain lackluster.  

Foreign money reported net outflows. So with foreign money and retail players on the sidelines, then all the smashing pump must have emanated from domestic financial institutions.

 

Even more, parabolic prices have emerged on some issues suggesting intensifying yield-chasing dynamics on select issues. 

Finally, a bearish rising wedge emerges in the backdrop of the current rally, which supports the overbought conditions of the index.   

Figure 3 

 

If I am not mistaken, this desire to participate in the global central bank fueled stock market bubble and embellish the system going into the 2022 national elections, as well as disguise mounting risks in the financial system, are the likely drivers of the recent pumps, even when fundamentals are far from attaining any meaningful recovery. 

 

By the way, there appears to be a close correlation between the local stock market index and Indonesia’s JKSE.  In the meantime, because COVID-19 cases in Indonesia are at a record high, her government re-imposed mobility restrictions. Yet, like her Philippine contemporary, the smashing pump. Incredible. 

 

3. The Proposal to Quasi-Centralize the PSE 

 

From CNN (July 2): In a virtual press briefing on Friday, PSE President and CEO Ramon Monzon said he wants to prune the number of stock brokerages to boost internal controls by increasing the minimum capital requirement. The PSE has yet to decide on the size, but there are 125 brokerage firms currently facilitating trades, while more sophisticated financial markets like Singapore has less than 30. "There are too many brokers for such a small market," Monzon told journalists. The proposal is to more than triple the current minimum unimpaired capital level for existing trading participants from ₱30 million to ₱100 million. "That's to make sure a broker will have the sufficient resources to having a complete organization with strong internal controls," the PSE official said. The plan comes after regulators revoked the licenses of Ventures Securities and another brokerage firm - R&L Investment - after a rogue settlement clerk was found to have fraudulently transferred ₱700 million worth of shares from one brokerage to the other. 

 

It is a disappointment to see private-sector regulators push for the quasi-centralization of the capital markets. This opinion or advocacy reflects the popular political sentiment where social and economic ills are supposedly best served by omniscient authorities.  

  

Here, the industry players bear the yoke of the administrative failures of the regulating body.  Rather than reforming management, simply pass the blame on the regulated. 

  

Indeed, while firms with higher capital may have sufficient resources, it is not necessarily true that this would induce 'strong internal controls'. If this logic is valid, large-scale scandals (such as Enron, American International Group, Lehman Brothers, and many more) would not have occurred. Bernie Madoff too.   

 

If the sustained overlooking of the gaming of stock market prices through institutionalized 'marking the close' seems to be a practice by the PSE on regulating the markets, wouldn't such conditions incentivize, promote, or even reward unethical behaviors and unscrupulous activities? So does regulation fall only on disfavored entities? 

  

And instead of allowing market competition to prune the industry players to befit the market size, would such politicizing not tilt the balance of participants only to those with easier access to capital and or credit, but also to those with connections to the regulatory higher-ups?  

 

In so doing, instead of market competition, won't the industry will be cartelized and dominated by the elites?

 

And we are supposed to believe that the path to centralization would lead to the development of capital markets?  Or are these further signs of the billowing big-government bubble and the business cycle?