When you net out all the assets and liabilities in the economy, the only thing left - the true basis of a society's net worth - is the stock of productive investment, education, and resources it has accumulated to provide for its people. Market cap is not aggregate "wealth."—John P Hussman, Ph.D
In this issue
Boomers Drive Digital Trading Growth as PSE Hits Record Stock Market Accounts in 2021
I. PSE Posts Record High Stock Market Accounts in 2021; Boomers as Prime Drivers
II. Stagnating Traditional Accounts, Rising Broker Risks
III. Other Barriers to Growth: Gaming the Index, Price Volatility and Distortions
IV. Financial and Economic Angst Prompted the Retail Stampede into Stocks
V. Insights from the Report
Boomers Drive Digital Trading Growth as PSE Hits Record Stock Market Accounts in 2021
I. PSE Posts Record High Stock Market Accounts in 2021; Boomers as Prime Drivers
So who says the Boomer generation is technology averse?
Because of the surge in the use of online platforms, the new accounts inundated the Philippine Stock Exchange (PSE). And boomers were part of the growth drivers!
Figure 1
In 2021, the PSE noted in its "Stock Market Profile 2021" that the stock market accounts jumped by 15.98%, the second-highest growth rate from 2018. (PSE, 2022) (Figure 1, topmost pane)
In nominal terms, 223,264 new accounts from its network of brokers represented the highest ever!
Hands down, this growth almost entirely sprang from online platforms, which soared by 23.8% or a net 222,384.
To simplify, online trading signified 99.8% of 2021's increase, pushing its share of the stock market accounts to an unprecedented 72%! (Figure 1, middle pane)
Two age groups posted the best gains in online trading in 2021.
The share of the seniors soared to 11.5%, more than double its 4.3% pie in 2020. This group is likely to have the most savings.
The 18-29 age group placed second. It posted an increase to 41.2% share from 26.8% in 2020, a 53.7% surge.
Interestingly, the age categories representing 30 to 44 and 45 to 49 registered significant decelerations.
II. Stagnating Traditional Accounts, Rising Broker Risks
There was barely any growth in the traditional brokers, which saw an increase of 430 accounts or .09%.
Yet there are only 33 brokers with online facilities in a field of 125. These numbers infer that while 26% of brokers are vying for growth, the dominant brick-and-mortar model with the online platform and themselves for a stagnant base of clients.
Figure 2
In this precarious environment of falling volume and a bear market, the survival of the old model hinges on operating efficiencies. Otherwise, some of them could be at risk.
Beyond the marked improvements in participation, the broader picture indicates that these are due to the low base effects.
The aggregate 1.62 million accounts of the PSE represent a paltry 1.5% of the estimated total population of 110.8 million or 3.4% of the 47.7 million labor force population over the same period.
These represent the direct accounts. It excludes indirect equity exposures through the buy-side institutions in the form of mutual, UITFs, and other trust funds.
That is to say, the thrust to attain deep and efficient capital markets remains a distant dream.
III. Other Barriers to Growth: Gaming the Index, Price Volatility and Distortions
But many significant obstacles emerge from current conditions.
It is not just the flagging volume. The low penetration level widens the bid-ask spread, increasing transaction costs.
The dwindling trading volume is a symptom of financial liquidity, a byproduct of monetary policies intended to bail out the banking system. The liquidity spillover from the BSP's 2020 historic Php 2.3 trillion injections expanded the PSE's peso volume in 2021. The listing of several REIT firms helped bulge the PSE's output. Liquid to assets ratio of banks coincides with the bump in peso volume. (Figure 2: topmost and second-highest window)
More significantly, the low penetration level magnifies incidences of pre-closing pumps of share prices of several members of the PSEi 30, with the possible intention of artificially propping up this benchmark by an undisclosed cabal. Perhaps these outfits represent the counterparts of China's 'national team.'
While consensus only sees its benefits, they ignore its costs.
Pronounced volatilities are not only the cost of managing price levels of stocks.
The more significant impact is the price signal distortion, which sends wrong signals to the economy resulting in the massive misallocation of resources.
IV. Financial and Economic Angst Prompted the Retail Stampede into Stocks
The present bear market poses another challenge.
The record growth in the number of participants occurred even as the PSEi 30 reported a slightly negative return of .24% in 2021. Retail accounts probably chased the 2H rally going into 2022. (Figure 2, second to the lowest pane and lowest window)
The sluggish economy, lingering joblessness, and negative 'real' rates from the monetary policies of the BSP may have induced many to use their savings to speculate.
An international study showed that the pandemic "spawned a new breed of retail investors, of whom many are from emerging markets, relatively younger but with less money at their disposal, transacting remotely and keen on digital assets." (2022, April 22, Business Inquirer)
The Global Retail Trends Report found that "lockdowns and working remotely resulted in “remote investing” not only in advanced markets but in emerging markets as well."
They cite the Philippines: "In the Philippines, 48 percent of respondents belong to this new generation of investors or those who started out after the onset of the pandemic—well above the global average of 35 percent. Many among these new investors have less than $10,000 at their disposal and, among Filipinos surveyed, 39 percent were motivated by their ability to start with a small amount. Also, more than half of Filipino respondents opened their most recent investment account via a mobile app or through a smartphone, and 30 percent made their first investment in a digital asset."
This study matches the changes in the demographic dimension, which reported a surge in the age category of 18-29 years.
Figure 3
The PSE report exhibited a surge in unemployed traders. Interestingly, 2021 reinforced the downtrend in self-employed retail accounts. (Figure 3, higher window)
Perhaps, enhanced volatility also became an attraction, cultivating the impression that gambling can signify an alternative source of income.
Needless to say, the surge in new stock market accounts hardly signifies positive news.
Instead, it is a symptom of desperation as hard-pressed individuals have sought anodyne from the stock market in the hope of benefiting from speculation.
And the pang from the mounting losses could lead to depression should the markets persist in heading south.
V. Insights from the Report
There are several insights from this report.
1. Neither hopium nor panic constitutes a strategy.
In bear markets, as a Wall Street axiom goes, "Markets descend on the ladder of hope."
The anchor for both is emotions than reasoning.
2. There are principal-agent problems potentially embedded in financial institutions promoting investments. They may not be looking at the interest of their clients.
Instead, operating under current conditions, they could be promoting investments to create a counterparty to allow them to exit.
Fees and commissions comprise their principal sources of revenue, which implies dependence on quantitative rather than qualitative metrics.
3. The PSE has shifted to digital. It cemented its position by giving up its trading floor last June 24th. For the industry, it means that to grow, embracing digital trading is a prerequisite.
4. The general strategy of the industry is to promote buy-side products to clients. Or, the saving public becomes entirely dependent on the discretion of fund managers. Unfortunately, most of them were oriented to see markets and economics in the direction of the eternity of easy money policies.
They maybe practitioners of this adage.
"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men." (Keynes, 1932)
5. Yet, there remain pockets of growth overall.
In select age groups, the potentials are in the savings-rich Boomers, even for traditional accounts.
Also, with the lopsided concentration of new accounts in Metro Manila, the urban areas of the other regions may function as growth corridors. (Figure 3, lowest window)
The irony is that this extreme clustering showcases the lack of confidence in the stock market outside 'imperial' Manila, possibly a ramification of a combination of lack of understanding or education. Moreover, stocks are hardly viral for people who got burned or had an adverse experience.
Foreign retail accounts are also potential targets for account generation.
But timing the market cycle is necessary for such a setup. Or, the best time to solicit new accounts is when the market has bottomed or is close to bottoming.
Without understanding market cycles, promoting stocks may only backfire.
________
Bibliography
CORPORATE PLANNING AND RESEARCH DEPARTMENT (May 2022), Stock Market Profile 2021, May 2022, PSE.com.ph
2022, April 22 Digital investors rise in PH amid pandemic–US study, Business Inquirer
Keynes, JM (1932), The Consequences to the Banks of the Collapse of Money Values (Aug. 1931), Essays in Persuasion, Economics Network.AC.UK
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