Here then is a crucial point: you cannot plan markets. By their very nature, you can only set people free so that they can interact and exchange, and thereby develop markets themselves. Similarly, several of the socialist countries, seeing the importance of the capital markets in the West, have been trying to develop stock exchanges, but with little success. First, again, because stock markets cannot be planned, and, second, because, as we will see further, you cannot have markets in titles to capital if there are still virtually no private owners of capital in existence—Murray N. Rothbard
In this issue
Why PSE’s Share of Active Stock Market Accounts Dropped to 20% in 2022, The Role of Savings in the Stock Market
I. As Part of the Capital Market, the Role of the Stock Market is Economic
II. How Stock Market Deficits Compound on the PSE’s Liquidity Predicament
III. While the Growth of New Stock Market Accounts Slowed, the Share of Active Accounts Plummeted!
IV. Demographic Distribution: Most Affected Groups were (Generally) Gen-Z Group and Seniors
V. Declining Bank Liquidity, Falling PSE Volume and the PSEi 30’s Bear Market; What to Expect
Why PSE’s Share of Active Stock Market Accounts Dropped to 20% in 2022, The Role of Savings in the Stock Market
Philippine PSE 2022 Investor’s Profile: The growth rate of new accounts fell while the share of active accounts dived. Why? Scant savings caused the decline in PSE volume and equity losses.
I. As Part of the Capital Market, the Role of the Stock Market is Economic
PSE, June 5, 2023: The number of online stock market accounts rose by 8.6 percent in 2022 to 1,258,907 accounts. Despite the muted growth in online accounts compared to previous years, the average value per online transaction rose by 33.2 percent to Php 46,236.40 from Php 34,701.80 in 2021. While close to 100,000 online accounts were added last year, its non-online counterpart recorded a decrease of 7,156 accounts to 453,827. Given this, the total stock market accounts registered in 2022 was at 1,712,734, up by 5.7 percent from 2021’s 1,620,017 accounts. “The growth in accounts may have been subdued in 2022 but I expect an uptick in numbers again with the foray of new stock brokerage firms in the online trading space and the upcoming rollout of stock investing features in finance apps,” said PSE President and CEO Ramon S. Monzon.
In 2022, the PSEi 30 returned -7.8%, anchored on a plunge in peso volume (19.9% gross and 20.8% main board).
Remember that equity transactions are always funded.
On this note, the depressed volume reflects a shortfall in domestic savings or disposable income and credit flows (from local savers, foreign savers, & money from loans unbacked by savings or "fiduciary media").
Fundamentally, capital markets serve as an intermediary to channel savings into investments. The capital market primarily consists of stocks (stock-related instruments such as ETFs, REITs, and more) and fixed-income securities (debentures, commercial and Treasury bonds).
While a crucial aspect is financing, its obverse side is entrepreneurial resource allocation.
So, we depart from the incumbent BSP chief's perspective of the capital market.
What does that mean? What it means is that, over time, if you wait long enough, the market cap will probably be growing faster than the economy. What that says is that, over time, initially, economies are driven by big personalities and families. Of course, it is only appropriate that we are talking about the Ayalas or the San Miguels.
But, over time, as the economy tries to grow and get more and more financing from everyone, we need capital markets. Of course, banks usually grow ahead of capital markets but, hopefully, soon to follow are other ways of raising capital-the biggest two of which are the bond market and the stock exchange. (Medalla, 2023)
Banks outgrow the capital markets fundamentally because of existing policies biased against a market-based distribution system and the implicit "trickle-down" policies embraced by authorities.
Figure 1
Proof?
Banks have almost monopolized the financial industry; the aggregate bank share of the total financial resources has been close to its highest level at 82.5% as of April 2023, which raises concentration risks. (Figure 1: topmost pane)
And this is supposed to represent a "sound" financial system?
And capital markets seem neither about adrenalin boosters nor feeding the government.
In a way, the stock market is like your pulse rate. You get excited, it goes up. You hear Professor Medalla, it goes down because he lulls you to sleep.
But what matters is the long-run average. You need people to watch the economy 24/7. You need people who watch companies 24/7.
By the way, this means great value for the government itself. Because as companies make accounting [disclosures] to their stakeholders, the BIR [Bureau of Internal Revenue] gets a lot of data. [So,] it gets harder and harder to have multiple books. As the government, in turn, gets more money, it can have more money for financing infrastructure and social development. (bold added)
Au contraire, instead of helping savers distribute capital to its best and most efficient or productive commercial use through price discovery, feeding the government, which translates to consumption than production and competition with the markets for resources, fosters economic imbalances.
Of course, the government uses the bond markets to raise Treasury funds from savers. Thanks to the capital markets, the Philippines' public debt hit a milestone of Php 13.9 trillion last April 2023.
And easier access to the public's savings could be one reason behind the botched attempt by the state-owned Landbank to acquire (nationalize) the PDS from the PSE.
Based on ADB data, the Philippines has the second smallest bond market in the region after Vietnam.
The imperatives of the capital markets are savings and capital formation, as explained by economist Fritz Machlup:
A process of capital formation is set in motion only if the income which is not consumed is used for production. It does not matter whether the saver is himself the entrepreneur or whether he places his purchasing power or money capital at the disposal of another entrepreneur. The process of transferring savings to the producers may be performed through the borrowing and lending facilities of the savings banks, but mainly through the capital market which centres around the securities market. Which one of these organizations for transferring savings will be used will depend in each case on judgments as to risk and liquidity (the possibility of withdrawal or realization by selling) and prospects as to yields. If the savings are put into savings bank deposits, the yield will be equivalent to the interest payment. If they are used to purchase fixed interest-bearing securities (mortgage loans, bonds, debentures) the yield will take the form of interest and capital appreciation. If they are used to purchase shares, the yield will consist of dividends and capital appreciation. The relative attractiveness of savings deposits, the bond market and the stock market, changes with the different phases of the trade cycle. (Machlup, 1940)
With this in mind, it comes as no surprise why organized and managed pumps and dumps (mostly during the pre-closing phase) have become a defining characteristic of the PSE. (Figure 1, middle window, chart from technicstock.net)
When the prevailing perception is that capital markets should perform political objectives, it is bound to become inefficient, which forfeits their implied benefits. And present conditions only elaborate such decadence.
II. How Stock Market Deficits Compound on the PSE’s Liquidity Predicament
Declining savings has not only been evident in the economy but have also surfaced in the PSE through diminishing volumes or market liquidity. Philippine gross savings rates have been on a structural downtrend. (Figure 1, lowest chart)
And deflating asset prices becomes a self-reinforcing dynamic as many participants become "HODL" (hold on for dear life) while enduring reduced paper wealth.
Further, via the wealth effect, personal or corporate balance sheet deficits may lead to diminished consumption.
For a debt-dependent economy, cascading asset prices lower collateral values magnifying collateral calls or margin calls, which amplifies the risks of liquidations.
Easy money "stimulus" will be of little help when the pool of wealth ("real" savings) declines. Although it buys time, it only aggravates the underlying conditions.
Finally, asset losses are not the only consideration; inflation rubs salt in the balance sheet wound.
III. While the Growth of New Stock Market Accounts Slowed, the Share of Active Accounts Plummeted!
Symptoms of these forces are evident in the degeneration of participation or penetration rates at the Philippine Stock Exchange.
Figure 2
Yes, nominal stock market accounts continue to grow, but since peaking in 2018, its growth rate has fallen. It grew by 5.72% in 2022, down from 16% in 2021. Total PSE accounts of 1.713 million represented about 1.5% of the 115.5 million population in 2022. (PSE, 2023) (Figure 2, highest graph)
Yet, more people have indirect exposure to the stock markets via mutual funds, UITFs, and ETFs than direct ones. Although here, we will be discussing the direct trading accounts via the network of PSE brokers.
The net gain of 92,717 accounts in 2022 was the smallest since 2017's 95,623. (Figure 2, second to the highest pane)
The corroding returns of the PSEi appear to have resonated with the public's participation. While the record PSEi high in early 2017 motivated the influx of the biggest crowd in 2018, the succeeding grinding bear market has reverberated with dwindling participation rates. (Figure 2, second to the lowest and lowest charts)
Figure 3
The online platform continues to draw retail participation, though. It was up by 8.62% in 2022—strikingly, a plunge from the double-digit growth rates from 2014-2021, which averaged 32.05%!
Nonetheless, with traditional or brick-and-mortar accounts suffering a 1.6% contraction in 2022, the online platform snared the majority (73.5%) of PSE investors. (Figure 3, topmost, second to the highest left and right charts)
The thing is, the deterioration has not only been on the slower entry of new players but on the share of active accounts, which fell to 20.2%, the lowest since at least 2012! In short, the PSE may have 1.7 million accounts, but only 345k were active. (Figure 3, second to the lowest graph)
Market internals data as daily trade, advance decline spread, and the number of issues traded daily confirm this.
Aside, including new entries, the sharp drop in active participants has been consistent with the entropy in volume/liquidity. (Figure 3, lowest window)
IV. Demographic Distribution: Most Affected Groups were (Generally) Gen-Z Group and Seniors
Figure 4
Also, the demographic distribution reveals a sharp decrease on the fringes of the PSE. Or, the penetration level declined significantly in the youngest and the eldest groups. This dynamic applies to both online and traditional accounts but includes inactive participants.
Seniors regressed to their pre-2021 levels but were slightly lower in total. In the context of the online platform, seniors also reverted to pre-2021 levels after the deviant spike in 2021. (Figure 4)
But the generally Gen Z group (18-29), the most vulnerable—reported a dive in account participation below the 2018-2021 levels.
The proposition could be that savings from jobs and income may have been difficult for the Gen Z category to enroll in the stock market.
The bulk of the investors/traders was in 30-60 years of age.
V. Declining Bank Liquidity, Falling PSE Volume, and the PSEi 30’s Bear Market; What to Expect
Figure 5
Finally, bank liquidity conditions resonate with the peso turnover at the PSE, as shown by cash to deposits and deposit liabilities. (Figure 5, top and second to the highest windows)
Since peaking in 2013, their declines have mirrored the ebbing flow of the PSE's gross volume, which includes special block sales. (Figure 5, second to the lowest graph)
To reiterate, ultimately, savings from capital formation will determine the fate of local equity markets. And this will be expressed by the peso volume/turnover, where price levels and participation rates should follow. After all, nothing draws a crowd more than winners.
What to expect?
With an exceedingly low base, the public's participation could grow (under present conditions), but perhaps to reflect population growth.
That said, a "foray of new stock brokerage firms in the online trading space and the upcoming rollout of stock investing features in finance apps" will hardly generate meteoric growth.
Like the real estate industry, such forecasts reveal the bedrock of mainstream expectations via the distortion of Say's Law "Build and they will come."
That the top 10 brokers have shanghaied no less than 50% of the daily mainboard volume in the face of declining stock market liquidity should make life more difficult for the industry. And institutional brokers comprise most of the daily top 10. (Figure 5, lowest chart)
According to the PSE, 125 brokers are active, and about 32 have online trading platforms. A back-of-the-envelope calculation means that 115 brokers (mostly retail-traditional models) compete intensely for the morsels.
But again, since savings are the roots, improvement in capital formation will be the foundation for increased returns and penetration levels.
And since there is little attempt to reform the "capital markets" to make these more market-oriented, present policies only entrench the extant imbalances.
Further, with the public programmed to believe that an easy money regime represents the path to utopia, its redistributive effects only lead to boom-bust cycles, which consume capital/savings.
Again, the principal beneficiaries of the politicized capital markets are the elites, who comprise the Forbes 50 wealthiest.
And though the stock market is not a casino, present policies have made it into one. And sadly, small retail investors pay for it with the depletion of their savings. Ergo, the shrinking direct active participation in the PSE.
Remember, pricing integrity is one of the prerequisites of healthy capital markets.
Until then, the current decremental conditions should prevail.
As contrarian investor Doug Casey has adroitly observed, "Trends in motion tend to stay in motion."
____
References
Felipe M Medalla: Beyond just a bellwether - the capital markets as catalyst for dynamic and inclusive economic growth, Speech at the inauguration of the Philippine Stock Exchange's new events hall, Manila, 28 May 2023, Bank of International Settlements, June 1, 2023.
Machlup, Fritz The Stock Market Credit and Capital Formation, William Hodge and Company, 1940 Mises.org p.27
Philippine Stock Exchange 2022 PSE Stock Market Investor Profile, PSE.com.ph May 2023
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