Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4)

  

The reason that interventionism does not work is that it misallocates more resources in the economy. More importantly, it disturbs, distorts, and destroys the corrective process whereby entrepreneurs, the price system, and the bankruptcy and foreclosure procedures do their jobs in reallocating resources and prices back into a sustainable framework—Mark Thornton

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4) 

I.  Prelude: Stagflation: From Distortion to Repricing

II. The 1970s Stagflation: Adjustment Deferred, Not Avoided

III. Why It “Worked”: Structure and Illusion

IV. The Structural Break: From Production to Balance Sheets

V. The Misdiagnosis: Policy as Cause vs Policy as Reaction

VI. PSE: “Cheap” Is Not Value—It’s a Signal

VII. The Real Parallel: Mispricing Before the Break

VIII. Financial Markets: When the Adjustment Starts Showing

IX. From FX to Interest Rates: The Repricing Chain

X. The Policy Trap: Tighten Into Weakness

XI. Conclusion: The Illusion Is Ending 

Stagflation Then and Now: Why Philippine Markets Are Repricing Like the 1970s (Part 4) 

Why today’s Philippine crisis is less about shocks—and more about structure 

I.  Prelude: Stagflation: From Distortion to Repricing 

This piece builds on a series of reports examining how policy interventions have reshaped the transmission of inflation and risk in the Philippine economy. 

Earlier work showed that measures such as price controls, subsidies, and liquidity support did not eliminate underlying pressures. They delayed and redistributed them—shifting inflation across sectors, compressing real incomes, and allowing imbalances in the currency, credit system, and fiscal position to accumulate beneath the surface. 

This follows earlier reports, including:

• Stagflation Is Already Here—Emergency Policies Are Now Entrenching It
• Stagflation by Design: Policy Contradictions and the Return of the Pandemic Rescue Playbook
• The Anatomy of Philippine Stagflation: BSP Rate Hikes, Record External Deficits, and Fiscal Expansion (Part 3)

Across these, the pattern has been consistent:  stability was not the resolution of imbalances—but their deferral. 

This installment extends that framework by placing current market behavior—particularly in foreign exchange, equities and fixed income—within a historical context. 

The objective is not to argue that history repeats. 

It is to show that while the structure has changed, the mechanism has not. 

Markets reprice when constraints begin to bind. 

And increasingly, that repricing is no longer isolated. 

It is systemic. 

A note on context: the parallels to the 1970s should not be read as a direct comparison of regimes. The policy structure, institutional constraints, and transmission channels today differ significantly from the Marcos Sr. period. What persists is not the form—but the mechanism of deferring adjustment. (See linked note.)

II. The 1970s Stagflation: Adjustment Deferred, Not Avoided 

The Philippines is not new to stagflation. 

The oil shocks of 1973 and 1979 triggered inflation surges, currency pressure, and eventually a full-blown financial crisis in 1983. 

But what made the 1970s episode instructive is not the shocks themselves—it is how the system absorbed and deferred them.

Figure 1 

Following the 1969 balance of payments (BoP) crisis, the peso was sharply devalued, moving from roughly 3.9 to near 6 per dollar, before continuing a managed depreciation into the 7–8 range by the early 1980s. (Figure 1, topmost pane) 

The adjustment was immediate—but the consequences were not. 

Growth held. Real GDP expanded strongly in 1973 and again in 1976—until the early 1980s (Figure 1, middle image) 

Inflation surged during the oil shocks, with 1973 posting a sharper initial spike (~35% peak) than 1979 (~22%). Yet the true inflation (~63%) blowout did not occur during the shocks themselves—it came later, during the 1983 debt crisis. (Figure 1, lowest visual) 

This is the first principle: 

Inflation peaks at the point of financial rupture—not at the initial disturbance.

Figure 2

Equities confirm the same pattern. The Philippine stock index, the Phisix, reached an all-time high in January 1979—in the middle of stagflation. The collapse only followed when the system’s accumulated imbalances finally surfaced. (Figure 2, upper window) 

What appeared as resilience was, in reality, deferred adjustment. 

III. Why It “Worked”: Structure and Illusion 

The 1970s economy was industry-led, and the market reflected it. (Figure 2, lower graph) 

Mining, commodities, banks, and industrial conglomerates dominated the headline index—the Phisix, presently the PSEi 30. 

Figure 3

Mining firms like Atlas, Benguet, Philex, and Marinduque were not peripheral—they were central. Mining alone likely accounted for roughly a quarter to a third of market weight at points in the decade. (Figure 3, upper table) 

This mattered. 

Commodity inflation translated directly into nominal earnings growth. The stock market rose not despite stagflation—but partially because of its structure within it. 

But this alignment masked fragility.

• External borrowing recycled global liquidity
• Policy smoothing suppressed volatility
• Currency management slowed visible adjustment 

This is straight out of Hyman Minsky financial instability hypothesis: 

Stability is not the absence of risk—it is the accumulation of it under suppressed volatility. 

By the early 1980s, the system had transitioned from hedge finance → speculative → Ponzi-like dependence on refinancing. 

When confidence broke in 1983, the adjustment was nonlinear and disorderly:

• Peso collapse
• Inflation spike
• GDP contraction
• Equity drawdown exceeding 80%

The 1970s didn’t avoid crisis.

They financed its delay. 

IV. The Structural Break: From Production to Balance Sheets 

The biggest mistake today is treating stagflation as if it still transmits through the same channels. 

It doesn’t. 

The Philippine economy is now services-led. The equity market is concentrated in:

• Financials
• Services
• Utilities
• Conglomerates 

This is no longer a production-driven system—it is a balance-sheet-driven system. 

Which means stagflation now transmits through:

• Leverage (public and private) [domestic claims-to-GDP reached all-time highs in Q4 2025, coinciding with a reacceleration in M2 and M3/GDP] [Figure 3, lower graph]
• External funding dependence
• Liquidity conditions
• Credit creation and rollover risk

This dynamic is closer to a balance-sheet-driven transmission mechanism—more in line with Richard Koo’s framework—than classical supply-shock stagflation. 

Growth doesn’t collapse immediately. 

It gets financially constrained first. 

V. The Misdiagnosis: Policy as Cause vs Policy as Reaction 

The mainstream framing—that BSP tightening is "hurting growth and markets"—gets the sequence wrong. 

Tightening is not an exogenous shock. 

It is a lagged reaction to prior distortions (e.g. savings-investment gap), which are being reinforced by current emergency policies, including: 

• Price suppression (energy, transport)
• Subsidy transfers
• Fiscal expansion
• Liquidity injections 

This is where Friedrich Hayek’s theory of malinvestment becomes critical: 

Artificially suppressed price signals do not eliminate inflation—they misallocate capital, embedding inefficiencies that eventually require a more painful correction. 

When tightening finally arrives, it does not “cause” fragility. 

It reveals it. 

VI. PSE: “Cheap” Is Not Value—It’s a Signal 

The persistent discount of Philippine equities is often framed as ‘opportunity.’ 

That interpretation is increasingly untenable. 

The discount reflects: 

Figure 4

• Narrow market breadth
• Index concentration risk, including free-float-driven weight concentration in a small number of large-cap names (e.g., International Container Terminal Services Inc. and Manila Electric Company), with combined index influence at unprecedented levels [Figure 4, topmost image]
• Weak transmission from growth to earnings
• Broadening dependence on leverage rather than productivity
• Deepening price distortions that transmit into real-economy misallocation 

This is consistent with Public Choice Theory dynamics:

Policy frameworks optimize for political constraints rather than economic efficiency, producing structural drag that markets eventually price. 

“Cheapness” here is not cyclical. 

It is structural risk pricing. 

VII. The Real Parallel: Mispricing Before the Break 

The deeper parallel between the 1970s and today is not oil. 

It is this: 

Stagflation distorts asset prices before it destroys them.

The break occurs when financing conditions can no longer sustain the distortion.

• In the 1970s → external debt crisis
• Today → balance sheet compression + liquidity stress → ??? 

The danger may not be immediate collapse. 

It is prolonged mispricing. 

VIII. Financial Markets: When the Adjustment Starts Showing 

Recent market behavior suggests the adjustment is no longer latent. 

From the outbreak of the February 28, 2026 Iran war to May 1, Philippine equities have materially underperformed regional peers—the second worst performer after Indonesia, while the peso has simultaneously weakened to record levels. [Figure 4, middle diagram] 

But the sequencing matters more than the outcome: 

• Government securities outflows began in Q4 2025 and worsened in Q1 2026, dragging overall foreign portfolio flows to their deepest quarterly outflows since at least 2020 [Figure 4, lowest chart]
• PSE outflows persisted throughout 2025
• Currency weakness accelerated into 2026
• External shocks have accelerated volatility. 

They did not initiate it. 

This aligns with Dornbusch Overshooting Model dynamics:

Exchange rates adjust rapidly—not because shocks are new, but because imbalances were already embedded. 

What we are seeing is not reaction. 

It is exposure. 

Attributing the move to a “strong dollar” or external shocks is not analysis—it is attribution bias dressed up as explanation, deflecting from domestic policy choices that built the conditions for this adjustment. 

Global factors may set the trigger. 

Domestic imbalances determine the magnitude. 

IX. From FX to Interest Rates: The Repricing Chain 

The move past 61 in USDPHP is not a currency story. 

It is the first visible break in a multi-layer repricing cycle. 

The sequence is now clear:

Figure 5

1. FX moves first 

Driven by external deficits, energy imports, depletion of buffer and capital outflows. 

2. The belly reprices (3–7Y) 

Reflecting expectations of forced policy tightening (Figure 5, topmost pane] 

3. Term premiums widen (10Y and beyond) 

Consistent with duration risk being repriced beyond near-term policy expectations [Figure 5, middle image] 

This progression is not occurring in isolation. 

The widening spread between Philippine 10-year yields (BVAL) and U.S. Treasuries (TNX) has tracked the move in USDPHP, reinforcing the pattern: currency stress is being matched by higher required returns on local duration. [Figure 5, lowest chart] 

This is not simply global rates pulling yields higher. 

It is domestic risk being repriced across FX and bonds simultaneously. 

X. The Policy Trap: Tighten Into Weakness 

Unlike 2021–2022, the system now faces:

• Weaker growth
• Higher fiscal dependence
• More fragile balance sheets 

Which creates a constraint:

• Policy cannot ease without worsening inflation and FX pressure.
• Policy cannot tighten without compressing growth and liquidity. 

This is a classic stagflationary policy trap. 

And it reinforces our core thesis: 

The peso is not the cause.  

It is the pressure valve. 

These distortions are not abstract. Recent interventions—from the suspension and subsequent restoration of the Wholesale Electricity Spot Market (WESM)—effectively redistributing costs rather than removing them (which affirms our recent call), to staggered power rate adjustments and subsidy layering, to DOLE looking at a Php 600 minimum wage hike in NCR, to the CHED declaring no tuition increases to the BSP’s April CPI projection heating up 5.6% to 6.4% —illustrate the same pattern: prices are suppressed, pressures accumulate upstream, and are later released into the system with greater force.

Figure 6

This distortion is already visible at the firm level. Manila Electric Company [PSE:MER] belatedly release 2025 Annual Report shows (pre-war, pre-oil shock) revenues rising sharply—driven not by demand, but by pass-through charges, regulatory recoveries, and expanding generation-side income—even as electricity consumption contracts. [Figure 6] 

The divergence is structural: nominal revenues are being supported by fuel costs, grid charges, currency effects, and reserve market dynamics, while underlying usage weakens. 

This is the money illusion in practice—where rising prices and cost recovery sustain top-line growth, masking real demand erosion. 

It also reveals how regulatory and policy frameworks redistribute cost pressures—disproportionately benefiting incumbents and entities positioned within the regulatory structure—rather than absorb them. Within a pass-through pricing system, higher fuel, currency, and grid costs are transferred directly to consumers, sustaining revenues while weakening purchasing power. 

Over time, this produces structurally higher and less competitive energy costs—eroding real incomes and compressing savings. 

In a consumption-driven economy, that is not resilience. 

It is price-induced demand compression/demand destruction. 

It also shows that downstream utilities are not insulated from stagflation—they internalize it through pricing while externalizing its costs to consumers. 

XI. Conclusion: The Illusion Is Ending 

The lesson of the 1970s is not that stagflation causes immediate collapse. 

It is that systems can appear stable while imbalances accumulate beneath the surface. 

That dynamic has not changed. 

What has changed is structure. 

Then, distortions were anchored in production and commodities—where rising prices could partially offset inflation’s drag. 

Today, fragility sits in balance sheets, within a consumption-driven economy increasingly dependent on credit. 

This distinction matters. 

Consumption financed by leverage is inherently unstable. It holds—until financing conditions tighten. 

Which means the adjustment is not guaranteed to be gradual. 

It can appear contained—until constraints bind. 

External shocks—whether from energy, currency, or global liquidity—do not create the crisis.

They expose imbalances already embedded in the system. 

When that happens, the transition is no longer linear. 

It becomes a sudden repricing of demand, liquidity, and risk. 

Deferred adjustment does not eliminate crisis. 

It compounds and compresses it. 

The market is not misreading noise. 

It is beginning to price a system where stability depends on conditions that may no longer hold.

 

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

 

Bubbles are mechanisms of wealth redistribution and destruction – with detrimental consequences for social and geopolitical stability. Boom periods engender perceptions of an expanding global pie. Cooperation, integration, and alliances are viewed as mutually beneficial. But perceptions shift late in the cycle. Many see the pie stagnant or shrinking. A zero-sum game mentality dominates. Insecurity, animosity, disintegration, fraught alliances, and conflict take hold—Doug Noland 

In this issue

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

I. PSEi 30’s Early Start: A Strong Tape — On the Surface

II. Headline Strength vs. Structural Fragility

III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance

IV. Breadth and Liquidity: Gains with Caveats

V. Confidence Policy and Market Structure Risk

VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities

VII. Conclusion: When Index Strength Outruns Market Health 

Liquidity at the Top: The PSEi 30’s Two-Months Rally Meets Structural Fragility Amid Middle East War Risks

Index strength masks concentration, policy engineering, and rising geopolitical fragility 

I. PSEi 30’s Early Start: A Strong Tape — On the Surface 

The PSEi 30 closed the week up 2.26%, pushing its 2‑month return to 9.22%—one of the strongest early-year performances in recent years.

Figure 1

The Philippine market appears to be benefiting from abundant global liquidity and rotational flows. Last year’s Asian laggards—Thailand and the Philippines—are now among the top YTD performers, alongside continued momentum in high flyers such as South Korea, Taiwan, Japan, and Singapore. (Figure 1, upper window) 

Yet the strength has emerged despite an “unexpected” Q4 GDP slowdown to 3%. 

In February alone, the PSEi 30 posted a 4.46% MoM and 10.22% YoY gain. (Figure 1, lower table) 

The divergence between slowing output and rising asset prices was not organic—it was liquidity-driven, fueled by foreign inflows and heavy concentration in select index names. 

The tape is strong. The base is narrow. 

II. Headline Strength vs. Structural Fragility 

Cap-weighted indices increasingly function less as barometers of broad market health and more as mirrors of heavyweight concentration. 

This is not unique to the Philippines. The MSCI World Index, for example, is heavily skewed toward the United States and further concentrated in mega-cap technology firms. 

But scale matters. 

In deep, liquid markets, concentration often reflects earnings dominance, structural passive flows, and sustained institutional participation. While representation may be distorted, price discovery remains broadly competitive.

Figure 2

By contrast, in thinner markets, rising concentration is compounded by shallow turnover and limited participation. In such conditions, late-session or post-recess “afternoon delight” flows, along with pre-close (5-minute float) coordinated pump-dumps targeting heavyweight stocks, can exert an outsized influence on index levels. (Figure 2, topmost pane) 

The outcome is not simply greater concentration, but structural fragility — where headline index strength may owe more to liquidity conditions, market microstructure, and political dynamics than to broad-based economic vitality. 

Index gains, therefore, should not automatically be interpreted as evidence of systemic health. 

In shallow markets especially, strength at the top can coexist with weakness underneath. 

III. PSEi 30’s Concentration Risk: ICTSI’s Growing Dominance 

Performance has become increasingly concentrated. 

International Container Terminal Services, Inc. (ICTSI) now dominates index and sector dynamics: 

• Services index: +10.3% MoM, +45.74% YoY, +19.82% YTD (February 2026)
• ICTSI share of services sector volume: 52.35%
• Services sector share of main board value: ~35% 

ICTSI’s weight in the Services Index rose from 55.31% in January to a record 56.4% in February. (Figure 2, middle diagram) 

Its share of main board turnover increased from 15.32% to an all-time high of 18.48%, approaching the 19.8% peak recorded by PLUS during its July melt-up. 

Last February, foreign fund flows accounted for 16% of ICTSI’s total turnover—the highest level since at least October 2025 (Figure 2, lowest graph)

Figure 3

Within the PSEi 30, ICTSI’s weight surged to a record 19.3% on February 25, closing the week at 18.9%, as of February 26th.  (Figure 3, topmost image) 

The top five heavyweights now account for 51.51% of the entire index or five issues comprise more than half of the PSEi 30. 

This means: A 1% move in ICTSI contributes nearly as much to index performance as several smaller constituents combined. 

This is mechanical leverage embedded in construction. 

That is not breadth — it is structural leverage. 

February’s advance saw 20 issues rise, 9 decline, and 1 unchanged, with an average gain of 3.92% — slightly below the 4.46% free-float index gain, illustrating the impact of cap weighting. (Figure 3, middle graph) 

Year-to-date, ICTSI’s +26.23% outperformance has amplified this divergence. Among the top ten stocks (71% of index weight), gains were supported by AC, JFC, MBT, and MER, yet the average gain of the 19 advancing issues was 6.8% — still below the 9.22% index gain. (Figure 3, lowest chart) 

That February and YTD gap is weighting. This is not just concentration. 

It is weight-amplified performance dispersion. 

IV. Breadth and Liquidity: Gains with Caveats

Figure 4

The PSE’s market breadth improved modestly in February, extending January’s gains and helping buoy sentiment for the first time since 2019. (Figure 4, topmost diagram) 

Main board volume rose 16%, marking its second consecutive year of improvement. However, aggregate figures mask internal concentration, with ICTSI absorbing a substantial portion of incremental flows. (Figure 4, middle visual) 

Improvements in breadth have not been proportionately reflected in volume distribution or broader technical structures. 

V. Confidence Policy and Market Structure Risk 

The PSEi bottomed in mid-November 2025 — shortly before the appointment of a prominent tycoon to the Finance Department. (Figure 4, lowest image) 

Prior to this, a three-way energy deal involving SMC, MER, and AEV was announced. 

Subsequently:

• Real Property Taxes (RPTs) were suspended for energy firms.
• GEA-ALL subsidies to renewables were shifted to consumers.
• Banking system net claims on government surged to record highs in December. 

These are not neutral developments.

Figure 5

Expanded fiscal financing through the banking system injects liquidity that can spill into asset markets. (Figure 5, topmost window) 

Support measures for key corporates improve earnings visibility and collateral value. 

Infrastructure and energy subsidies reinforce balance sheet narratives for dominant index constituents. 

San Miguel shares initially led the PSEi 30 higher in Q4 2025 but have since given up more than half of their gains. (Figure 5, middle graph) 

MER and AEV shares joined the shindig along with the PSEi 30. (Figure 5, lowest chart) 

In this context, confidence appears to be a central component of policy transmission—whether through the Bangko Sentral ng Pilipinas or the Department of Finance—aimed at stabilizing sentiment, supporting collateral values, and encouraging distributional effects into GDP. However, confidence-driven liquidity does not eliminate underlying structural fragility, particularly in a concentrated and thin market environment. 

It merely elevates sensitivity to shocks. 

VI. Middle East War: Geopolitical Energy Shock and Philippine Macro-Financial Vulnerabilities 

The renewed outbreak of conflict in the Middle East involving the United States, Israel, and Iran introduces immediate geopolitical risk premia into global markets, with energy serving as the primary transmission channel. 

However, the duration of the conflict matters significantly. A short-lived escalation may generate temporary price spikes, while a prolonged confrontation would embed a more persistent risk premium across commodities and financial assets.

Globally, any credible threat to Iranian production—or worse, disruption of the Strait of Hormuz—could trigger sharp upside volatility in oil prices. Roughly 20% of the global oil supply passes through the Strait of Hormuz.  Even without a physical blockade, elevated risk alone tightens supply expectations and lifts futures curves. 

Higher crude prices would feed into transportation, manufacturing, and electricity costs, raising the probability of a renewed inflation impulse. 

Central banks could face a stagflationary dilemma: tolerate higher inflation or tighten policy into weakening growth. 

Financial markets would likely reflect classic risk-off dynamics—strength in oil and gold, alongside pressure on broad equities, particularly in energy-importing economies. 

For the Philippines, these global effects would be amplified by structural vulnerabilities. As a net oil importer, higher crude prices would directly raise domestic fuel, power, and logistics costs. According to the World Bank, Philippines net imports of energy use amounts to 54% as of 2022. 

This would place upward pressure on CPI and household expenses, further squeezing consumption—the (savings-investment gap) backbone of Philippine GDP. 

It would also increase pressure on debt-financed deficit spending, particularly as fiscal financing partly relies on foreign portfolio and external savings to bridge funding gaps. Higher global rates and a weaker peso could raise borrowing costs and heighten refinancing risks. 

A widening trade deficit driven by higher import bills would likely weaken the peso, reinforcing imported inflation pressures. 

This dynamic complicates policy for the Bangko Sentral ng Pilipinas. Any resurgence in inflation expectations could delay easing or necessitate tighter financial conditions, raising borrowing costs for property, consumer credit, leveraged corporates, and public finance. The resulting environment carries stagflationary characteristics: slower growth combined with sticky prices, increasing duration risk, interest-rate volatility, and credit risk across the financial system and the broader economy. 

As such, equity implications would be uneven—mostly adverse.

Figure 6

Energy and mining shares may respond positively to higher commodity prices, particularly upstream oil and gas producers and exploration firms that directly benefit from rising metal and crude prices. (Figure 6, upper chart) 

The Philippine mining and oil index has already been outperforming and diverging from the PSEi 30, suggesting early sectoral rotation toward commodity-linked exposures. Escalation in the Middle East would likely reinforce this divergence by sustaining risk premia in the gold and energy markets. (Figure 6, lower graph) 

In contrast, downstream refiners, distributors, and power utilities—especially those operating under regulated tariffs or fixed contracts—may face margin compression as input costs rise faster than they can be passed through. 

Transport, logistics, and consumer-facing sectors would similarly come under pressure from elevated fuel and operating expenses, alongside a further erosion of household purchasing power. 

At the macro level, sustained deficit financing in a higher-rate environment could intensify crowding-out effects, as government borrowing absorbs liquidity that might otherwise support private sector investment. Combined with a declining standard of living and rising cost pressures, this raises the risk of credit stress and higher default rates across vulnerable households and leveraged firms. 

An additional layer of vulnerability lies in Overseas Filipino Worker (OFW) remittances. The Middle East remains a major employment hub for Filipino workers. Escalation or regional instability could disrupt employment conditions (estimated 2.2 million OFWs in the Middle East), delay remittance flows, or prompt repatriation risks. While remittances have historically shown resilience even during regional tensions, heightened uncertainty could dampen household confidence and consumption at the margin—particularly when layered onto rising domestic inflation. 

In sum, the conflict raises the probability of a commodity-driven inflation shock superimposed on already liquidity-sensitive markets. 

For the Philippines, the combined pressures of higher oil prices, currency weakness, policy constraints, and potential remittance volatility point to heightened market volatility and widening sectoral divergence amid slowing GDP growth. This increases stagflationary and credit risks. 

In such an environment, tactical positioning and selective exposure are likely to be more prudent than broad-based risk allocation. 

VII. Conclusion: When Index Strength Outruns Market Health 

The PSEi 30’s early-year advance is best understood as a liquidity-driven, weight-amplified rally rather than evidence of systemic market strength. With ICTSI alone approaching one-fifth of total index weight and the top five constituents exceeding half of the index, performance has become increasingly mechanical—driven by where liquidity concentrates, not how widely it is distributed. 

This structure matters. In a cap-weighted index operating within a thin market, marginal flows into heavyweight stocks can produce outsized headline gains even as broader conditions remain fragile. 

As geopolitical risks intensify—particularly through energy prices, inflation pressures, and policy constraints—the same index mechanics that amplified the rally could just as easily magnify downside volatility. 

In this context, selective and tactical exposure is more defensible than broad risk allocation. Headline strength may persist, but it should not be mistaken for resilience.

A Recap of 2022: Philippine Assets Under Pressure: Deficits Plagued the PSEi 30, Philippine Treasuries and the Peso

 A Recap of 2022: Philippine Assets Under Pressure: Deficits Plagued the PSEi 30, Philippine Treasuries and the Peso  

 

Philippine assets (PSEi 30, Philippine Treasuries, and the peso) were under pressure in 2022.  Below is a short explanation of the underlying dynamics driving the deficits. 

 

In 2022: while GDP Outperformed, Domestic Assets Wilted, Treasury Yields Surge 

 

Isn't it a puzzle?  Real GDP will likely print above 7.5% in 2022, but instead of celebrating, domestic financial assets endured much pain for the year. 

 

But why the contradiction?  In a word, inflation.  The underlying driver of the GDP signified a bane to the financial markets.  The high GDP print, therefore, represents a mirage, an artificial statistical construct. 

 

Figure 1 

Not only have yields of the Philippine Treasuries spiraled higher.  The BSP's response to inflation shifted the yield curve from steepening (rising slope) to tightening (flattening slope) at the end of the year.  The changing curves tell a story of financial accommodation towards tightening.  Even more, rising yields illustrate price losses from holdings of fixed-income securities. 

 

But the distribution of liquidity (easing/tightening) is not the same.   

 

On the one hand, higher official rates, rising bank holdings of Held to Maturity (HTM) assets, the actual bank credit delinquencies (but shielded by relief measures), and partial withdrawal of the BSP support of Philippine debt contribute to the recent tightening.  

 

On the other hand, financial easing/accommodation remains in specific segments of the economy.  These have been channeled through the capped interest rates on credit cards, the shift in the monetization of public debt from the BSP to the banking system, which helped support the near-record fiscal deficits, and rising interbank borrowing that has buttressed asset markets.  

 

After all, considering the alteration of the structural economic backdrop towards the dependency on credit, price deflation represents a taboo for central banks. 

 

And in the face of raising rates, the furtive retention of easy money policies into selected segments of the economy resulted in continuing and stubborn price pressures.   

 

As such, Philippine treasuries underperformed the Asian region in 2022 compared to most of its contemporaries, except Vietnam. 

 

Biggest USD Peso Returns Since 2008 

 Figure 2 

Aside from losses in fixed-income markets, the USD-Peso posted its best year in 2022 since 2008 with 9.33% returns.  The USD-Php surged by 15.12% back then.  A rising USD means losses for the peso.  

 

Yet, this year's gains represented the second consecutive year following 2021's 6.2% returns.  In two years, despite the interventions by the BSP, the USD Php registered cumulative returns of 16.1%.  

 

In the same plane, the two-year advance by the USD-Php reinforces its 52-year up trend (based on BSP end-of-year data), possibly fortifying the dynamics of the transition towards the age of inflation.  

 

While the USD rose against most Asian currencies, returns of the USD-Php represented the third largest in the region, after the Indian rupee and the Taiwan dollar. 

 

PSEi 30 Posted a Third Straight Year of Deficit 

 

A vigorous second-semester rebound in the benchmark index, PSEi 30, reduced some of its deficits that emerged from the selloff in the 1H.  

 

Figure 3 

In 2022, the PSEi 30 shed 7.81% (current peso), 13.6% (CPI-adjusted peso), and 14.2% (in USD). 

 

2022 represents the third consecutive year of deficits for the PSEi 30 (gross, real, and USD). 

 

Nota bene:  The percentage share weight of the top 5 market cap issues comprised 45.3% of the PSEi 30 at the close of 2022.  Also, the PSE changes the composite members of the PSEi 30 occasionally.  Therefore, annual returns reflect partial inconsistencies when compared with the past. 

 

The Asian-Pacific region generally suffered deficits in 2022.  Only 5 of the 19 national bellwethers produced positive returns, while the average YoY change was 9.6%.  So, the PSEi outperformed its peers. 

 

2022 Returns: Continuing Trend of Diminishing Returns 

 

Here is the thing.   

 

Despite the managed and orchestrated efforts to prop the index, there seems to be little appreciation that symptoms manifesting a structural defect of the PSEi 30 has resulted in its dwindling returns. 

 

Figure 4 

And this disorder does not represent an anomaly.   As previously pointed out, the law of diminishing returns has afflicted returns of the PSEi 30 since 2009.  2020's returns have only validated the prevailing phenomenon. (Prudent Investor, 2022) 

 

As such, the sustained decrease in the peso volume turnover has accompanied this entropic force, resonating with the slowdown in bank liquidity.  

 

The drawdown in volume plays a crucial role in shaping the returns of the PSEi 30. 

 

Again, the encumbrance of the PSE by the law of diminishing returns has been a function of two parts.   

 

First, in response to the Great Recession, the imposition of an easy money regime in the face of a relatively clean balance sheet resulted in a boom in financial assets from 2009-2013 (fixed income, peso, and the PSE).  Or financial assets easily absorbed the accommodation policies of the BSP. 

 

The second phase signified the manifestation of excess liquidity diffusing into the main street as "inflation." 

 

Decreased savings from reduced disposable income represented the partial effects of excess liquidity, which transformed into low liquidity available for PSE investments/speculations.  

 

Further, decreased liquidity also emerged from the extensive use of credit, which resulted in the rise of delinquent accounts.   Also, to shield the balance sheets from mark-to-market losses, banks resorted to the extensive use of HTM assets, which also dwindled liquidity conditions.

Mining and Financials Brave the Selling Storm

 

 Figure 5 

In dissecting the annual performance, the mining and financial index defied the gloom and stayed afloat, generating positive returns of 12.6% and 2.4% in 2022. 

 

While the average deficit of the members of the PSEi 30 was 8.6%, Semirara returned a stunning 61.6%.  Nine of the 30 issues posted positive returns.  After Semirara, Aboitiz Power (14.7%) and BPI (10.7%) took the second and third spots. 

 

Aside from the low volume, other factors exhibited a lethargy in the general sentiment, such as the sustained deterioration in traded issues, total trades, and advance decline spreads.  Also, concentrated trade activities showcased the staged support for the index. 

 

The Paradoxes of the Financial Index; Alpha Returns for the Mining Index? 

 

We end this 2022 recap with a few observations.  

 

Figure 6 

A steepening of the yield curve typically led to the outperformance of financials relative to the PSEi 30. 

But "is this time different?"  Financials continue to outperform even amidst the compression of the yield spread.   

 

And ironically, Financials has lifted the PSEi 30 even when its primary client, the real estate sector, has been weighed or marked down by the "market." 

 

Lastly, after long years of doldrums, the mining sector exhibits nascent signs of revival and the potential to deliver alpha returns. Will it?