Global Markets Catches Up with the Phisix; Has the JKSE-Phisix Correlationship Been Broken?
With the ongoing furious race to milestone heights, some may wonder why the Philippine Phisix has hardly participated in the “risk ON” environment that has overwhelmed global equity markets.
For instance, the Indonesian JKSE has broken into fresh record highs the other week. And this week’s .48% gains furthered the JKSE’s distance from the breakout point.
For now, Indonesian President Widodo’s earlier harangue and harassment of equity bears seem to have succeeded. Mr. Widodo has used the stock market as a policy tool to spiff up the administration’s image at the expense of the functioning market [see earlier email -The Indonesian Government Wages War on Stock Market Bears and Interest Rates! Phisix 7,240: Vulnerabilities of the Recent MELTUP, Duterte’s Expands War on the Poor (Ban on 5-6 Credit and SSS Benefit Hike) January 16, 2016]
Nonetheless, despite a slowing GDP and stagnating property prices*, since the Indonesian central bank (Bank Indonesia) cut policy interest rates for the sixth time in October 2016, such has incited the re-acceleration in loans to the private sector which was similarly reflected on the substantial rebound in the nation’s overall loan portfolio. Such jump in credit growth has likewise been manifested in the sharp escalation of money supply growth, seen via M2.
Taken together, a substantial portion of money injected into the financial system has only been rechanneled into domestic stocks from which have stirred a frenzied pump. And this has prompted for the recent fresh highs.
This exhibits how Indonesia’s stock markets have become another punter’s haven that has been detached from reality—largely bankrolled by easy money and by government’s intrusion in its stock market.
And this is the sort of dynamic that tells us why monumental history is presently unfolding…and not just in the context of record stocks, but of its aftermath.
*The Global Property Guide’s note on Indonesia’s 2016 housing prices (March 23 2017): “In Indonesia, residential prices in the country's 14 largest cities fell by 0.89% during 2016, after falling 0.2% in 2015. House prices fell 0.37% q-o-q during the latest quarter.”
Figure 1: ASEAN Equities Top, JKSE-PSEi Bottom
Back to the Phisix.
Given the present global conditions, the domestic benchmark has not underperformed.
Based on the year to date activities, the domestic bellwether has been almost at par with most the ASEAN’s equity benchmarks. Year to date, Indonesia’s record JKSE has delivered an inferior 5.11% return relative to the Phisix at 6.27% (as of March 24). The difference thus springs from the baseline effect—the Phisix began the year at a relatively lower base compared to JKSE.
This entails that the PSEi has outsprinted the rest of the field at the start of the year where the rest of the world has only been in a catch-up mode.
Yet the PSEi has spent over two months in a consolidation phase. Or it has been sauntering in a very narrow trading range (7,100-7,400) following the 9 day (engineered) meltup which occurred at the close of December through the first week of 2017.
Interestingly, the price trend dynamic of both the JKSE and the Phisix for the past two years or from 2014-2016 has revealed of amazing signs of synchronicity. Both yardsticks have essentially ascended and descended in seeming confluence. (see bottom figure 1). Or there appears to be a tight correlation for the noted benchmarks.
This convergent dynamic appears to have been broken only in the last two months.
JKSE’s record upside breakout came as the PSEi has forged what chart technicians call as a “flag formation”—a continuing pattern.
As a side note on flag formation: while the intermediate trend has been up, the originating trend has been down—so the 64 billion peso question is; continuation of what pattern? The answer lies on the observer’s bias.
Yet has there been a recalibration in the Phisix-JKSE correlationship? Or will there be a restoration of the previous convergence? If the latter on which direction?
More Signs of Price Instability
Here’s more.
Yet the present trading range has signified an outcome of rampant and relentless pumps and dumps.
End session pumps and dumps for the week totaled 55.56 points with 65% share accounting for as pumps and the remainder as dumps. The Phisix was down 1.03% or lower by 75.4 points. This entails the end of the week outcome has been immensely sanitized by price distortions borne out of such unscrupulous engineered price actions.
Figure 2: Stunning Amplification of Price Volatility
Such flagrant contortions can be seen in the escalating magnitude of volatility ensconced in the headline index.
The vast dispersion of gains and losses within sectors for this week has been astounding (lower left window).
The property, financials and industrials stunningly cratered by 3.5%, 2.48% and 1.73%, respectively. Because their combined market weighting at 49.09% (18.35% financials, 17.31% property, and 13.43% industrials—as of March 24) was slightly lower compared than the gainers at 49.69% (holding 39.37% and services 10.32%), the latter group’s impact severely diminished the enormous losses of the former group. The holdings and the services jumped by .83% and .86% this week. The combined events resulted in the diminished 1.03% decline in the headline index.
It’s even fascinating to see a rare unanimity in the price activities of the property and industrials. All property and all industrial issues tumbled this week! The property sector: Ayala Land (-5.48%) SM Prime (-3.28%), Megaworld (-3.06%) and Robinsons Land (-2.31%). The industrials: food giants Universal Robina (-1.23%) and Jollibee (-2.69%), backed by power firms Aboitiz Power (-3.22%), First GEN (-.45%), EDC (-.66%), Meralco (-4.21%) and Petron (-1.1%).
On the opposite end, eight of the ten or 80% of holding issues were sharply up: AEV (+3.29%), LTG (+2.8%) AGI (+2.68%), AC (+1.81%), GTCAP (+1.56%), JGS (+1.17%), SMC (+.97%) and the largest member, SM (+.6%). Supporting the holding sector, three of the four services also boomed; TEL (+3.84%), GLO (+1.78%) and ICT (+1.67).
In perspective, furious selling occurred in the property and industrials, aside from the financials, but ferocious bidding transpired at mostly the holding sector supported by the services.
It can be deduced that foreign money was responsible for most of the selling pressures in the Phisix given the largest net selling at Php 3.34 billion since end December. In the meantime, the locals shored up the PSEi gainers through a rotation. That is, perhaps locals sold holdings at the broad markets to finance aggressive bids in select PSEi issues. The 16.14% decline in peso volume indicated of a retreat in liquidity which most likely meant that buyers weren’t able to meet the seller’s urgency to exit, hence the expanded price volatility. In addition, the significant deterioration in market internals for both the PSEi and the broader spectrum suggests that selling activities were not limited to the PSEi 30 basket (except again for a few heavyweights).
The question is why the colossal deviances in the weekly activities, particularly for the holding sector, when their major subsidiaries were under severe selling pressure? Has this been designed anew to stage manage the index?
Even more. 12 issues or 40% of PSEi members had price changes of 3% and above (in both directions). 17 issues or 57% had price changes of 2% and above (again bidirectional). 25 issues or 83.33% registered price changes of 1% and above! (lower right window)
And yes such incredible escalating volatility has been happening even as the Phisix has been drifting in a tight zone.
Most haven’t realized that these are signs of a seismic buildup in stressors or a symptom of intensifying price instability. It’s either we’d be seeing a breakout above 7,400 or a plunge to 6,500 in the near horizon. Or we could even see both.
Has the Reflation Trade Climaxed?
And here’s the thing.
Has the euphoric and ebullient US markets lost its footing to mark a significant top? As I suspected, strains from US dollar illiquidity has once again resurfaced to have impelled oil prices to tumble back below $50.[See Has the Fed “Fallen Behind the Curve”? March 11, 2017]
It would be interesting to see what happens next to oil prices? Will it hold ground or flounder back to $45 or even below? If the latter should happen, then the reflation trade will almost certainly lose its shimmy. The question is how will this affect producers, creditors and fiscal conditions of producing nations
As for the US, will a reprise in the oil price debacle be now compounded by mounting woes in the US retail sector?
If the US stock markets flub, then just how will this affect the global risk ON scenario?
How will such reversal impact domestic stocks?
Interesting, no?
