Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

 

Causa remota of any crisis is the expansion of credit and speculation while causa proxima is some incident that saps the confidence of the system and induces investors to sell commodities, stocks, real estate, bills of exchange, or promissory notes and increase their money holdings. The causa proxima may be trivial: a bankruptcy, a suicide, a flight, a revelation of fraud, a refusal of credit to some borrowers, or some change of view that leads a market participant with a large position to sell. Prices fall. Expectations are reversed. The downward price movement accelerates—Charles P. Kindelberger 

In this issue

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

I. US Banks Powered Global Financials ETF to a Record High!

II. Melt-up! The Philippine Financial-Bank Index Carves a Fresh All-Time High!

III. Tightening, what Tightening? Finance Outperformed the PSE Since 2020, Banks Centralize Financial Resources

IV. The Paradox of Financial and Real-Estate Performance; Year-To-Date Performances of Listed Banks

V. Record Financial Index: From the Perspective of Volume and Foreign Money Flows

VI. Cross-Border Leveraged Speculation Powered the Record High of the Financial/Bank Index

VII. Bank Borrowings in a Melt-UP Phase too! Conclusion

Melt-Up! Philippine Financial-Bank Index Hits a Milestone High!

The share prices of many Philippine banks have been in a melt-up. But what’s been driving this surge?

I. US Banks Powered Global Financials ETF to a Record High!

Thanks to the extraordinary loosening of financial conditions, which has spurred booming credit and stock market activity, some of the top U.S. banks reported exceptional performance in Q3 2024 last week.

As a result, share prices of Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) soared to all-time highs.

In turn, BlackRock’s iShares Global Financials ETF, the IXG (NYSE ARCA: IXG), which has been on an uptrend since the lows of October 2020, also reached a fresh record high after surpassing its previous peak set in 2007.

The IXG's portfolio consists of 209 global equities primarily in financial services and banking, with over 55% of its holdings in US markets. This week, the IXG surged 2.25% and has generated a 26.13% return in 2024 (as of October 18).

Figure 1

Financials ranked fourth among the best-performing sectors in the S&P 500, with a 26.5% return, trailing Information Technology at 33.25%, Utilities at 29.3%, and Communications at 28.3% (as of October 18). [Figure 1, topmost table]

Despite the backdrop of supposedly high interest rates, October 2022 marked a turning point for the financial sector. This followed the Bank of England’s (BoE) intervention to rescue its troubled pension funds during the selloff of UK bonds.

The subsequent bailout of U.S. banks during the 2023 crisis further emboldened speculative activity, as central bank interventions have created what many view as a "moral hazard"—the belief that central banks will always step in to support the markets.

Expectations of easing by the Federal Reserve and other central banks have fueled the blistering rise of the IXG. The rapid pace of this ascent bears an unsettling resemblance to the 2007 episode, which preceded the Great Financial Crisis (GFC). [Figure 1, middle image]

II. Melt-up! The Philippine Financial-Bank Index Carves a Fresh All-Time High!

What does this have to do with the PSE?

The PSEi 30 closed the week ending October 18th up 1.44%, pushing 2024 Year-to-Date (YTD) returns to 14.97%.

Leading the gains this week was the Financial/Bank Index, with a 3.5% spike, followed by the Property Index, which climbed 2.11%.

The strong performance of the banking and property sectors supposedly reflects the Bangko Sentral ng Pilipinas' (BSP) announcement of its second round of rate cuts, effective October 17.

With this week’s surge, Financials have swiftly secured the second spot YTD with a 39.3% return, closing in on the ICT-led Service Sector, which holds the top position with 40.7%.

Since the PSEi 30 hit its June 2021 lows—mirroring trends in the U.S.—financials have sprinted ahead of other sectors. The Financial Index returned 29.9%, followed by the Property Index at 25%, both contributing to the PSEi 30’s overall 20.4% gain over this period. (Figure 1, lowest graph)

Figure 2

Here’s the thing: the Financial/Bank Index set a new record last September, surpassing its January 2018 high of 2,325.65. In a parabolic fashion, similar to global markets, the financial/bank index decisively reinforced its end-September breakout with this week’s push to 2,421.6. (Figure 2, topmost chart) 

Once again, China Bank’s incredible vertical rise is unprecedented, showcasing price volatility that is unbecoming of traditional banks. (Figure 2 middle chart) 

As previously pointed out, similar to the Lehman episode, skyrocketing prices tend to disguise underlying problems. 

In essence, the parabolic rise of financials hardly indicates a healthy bull market. If history serves as a guide (as seen in 2012 and 2018), this could be a sign of an interim top. 

Or could this time be different? 

III. Tightening, what Tightening? Finance Outperformed the PSE Since 2020, Banks Centralize Financial Resources 

The Financial/Bank Index currently consists of eight constituents: seven banks—Asia United Bank [AUB], BDO Unibank [BDO], Bank of the Philippine Islands [BPI], China Banking [CBC], Metrobank [MBT], Philippine National Bank [PNB], and Security Bank [SECB]—and one non-bank entity, the Philippine Stock Exchange [PSE].

Three of the bank members in the Financial Index are also part of the PSEi 30 composite, with two of them ranking among the top five.

While recent mainstream discussions have focused on how banks benefit from the liquidity injections via significant Reserve Requirement Ratio (RRR) cuts, and BSP rate cuts, the Financial Index has been outperforming the PSEi 30 since 2020. (Figure 2, lowest diagram) 

This trend began when the BSP implemented historic measures to support the industry, including quantitative easing (QE), rate cuts, RRR cuts, and relief measures.

This indicates that current dynamics represent a continuation of an underlying trend.

Figure 3

The BSP’s Total Resources of the Financial System (TRFS) data reveals that not only is it outgrowing GDP, but the share of banking resources—particularly from universal commercial (UC) banks—has been driving most of this growth. Philippine bank and UC bank share of the TRFS accounted for 83.4% and 78.05% last August. (Figure 3, topmost window) 

This highlights a concentration of resources and a deepening dependence of the economy on bank credit and liquidity. Thus, when officials claim they are promoting capital markets, it only holds true if banks benefit from it. 

Ironically, despite previous rate hikes, the TRFS suggests there has been little actual "tightening" or "restrictiveness" in the system. 

The outperformance of the Financial/Bank Index further confirms this. Yet, even with the availability of public data, discussions surrounding these insights are often sparse. 

IV. The Paradox of Financial and Real-Estate Performance; Year-To-Date Performances of Listed Banks 

In contrast, despite the substantial rebound in the Property Index from June 21 through September, it has yet to break its pattern of underperformance relative to the PSEi 30. (Figure 3, middle graph) 

These divergent trends suggest that, regardless of the measures undertaken by the BSP, the property sector remains hindered by internal challenges. 

In fact, contrary to most predictions, low interest rates have contributed to the real estate sector's struggles. As the BSP eased monetary policy over the past decade, the sector's value-added share of GDP fell to recent all-time lows—an indication of malinvestment. (Figure 3, lowest chart)

Figure 4 

Still, the Year-to-Date (YTD) performance of all listed banks, which has averaged a return of 27.08% as of October 18, has been skewed in favor of the banks that are part of the financial/bank index. (Figure 4, topmost image) 

Rocketing stock prices of Financial Index members AUB and CBC have delivered impressive YTD returns of 91.3% and 94.59%, respectively. (Figure 4, middle visual) 

Meanwhile, PSEi 30 mainstays BDO, BPI, and MBT produced returns of 25.7%, 37.9%, and 56.5%, respectively. SECB also saw a solid return of 36.5%. 

Have CBC and AUB struck a "gold mine" that the market has only recently discovered? 

V. Record Financial Index: From the Perspective of Volume and Foreign Money Flows 

Volume and foreign money flows offer another perspective.

Although the PSEi 30 briefly surged past 7,500 before retreating, trading volume remains relatively sluggish.  (Figure 4, lowest graph) 

But that’s only part of the story. 

What remains less known to many is that despite this overall lethargy, financials and banks have captured the bulk of the trading volume or a significant portion has been concentrated in financials and banks. 

The BSP and PSE have yet to release transaction data for August and September.

Figure 5 

However, using July data, the 7-month share of financials' volume relative to total market volume reached an all-time high of 23.7% in 2023. It has since retreated to 19.1% this year, the second-highest on record. That number, however, could reach a new high in October. (Figure 5, topmost image) 

As of October 18, the financial sector's share of gross trading volume had soared to 26.5% (and its share of mainboard volume to 29.6%). 

In other words, the financial/banking sector has absorbed about a quarter of the PSE's sluggish trading volume! That’s an astonishing level of concentration risk—Incredible! 

Given my limited access to sophisticated database organizing tools, I have only managed to tabulate foreign flows using October data, which is limited to the top five Financial Index members: AUB, BDO, BPI, CBC, and SECB. 

There is no question that these top five banks dominate the turnover share, accounting for 90.7% during the week leading up to October 18 and 84.8% for the entire month of October. 

VI. Cross-Border Leveraged Speculation Powered the Record High of the Financial/Bank Index 

But here are some additional insights: 

Net foreign inflows of Php 892.5 million for the top five banks represented 20.94% of the Php 4.261 billion total foreign inflows for October.

Notably, a substantial portion of this, accounting for 87.8% or Php 953.2 million, originated from last week alone, out of a total inflow of Php 1.086 billion.

In short, the recent surge to a record high in the Financial/Bank Index was largely driven by foreign capital, likely bolstered by the "national team" (such as the treasury departments of banks, Maharlika SWF and other financial corporations or OFCs?).

Stunning.

It’s looks likely that some of the foreign money chasing the U.S.-based IXG (iShares Global Financials ETF) rally has been positioning itself in emerging market banks like those in the Philippines. 

What we are witnessing appears to be unadulterated, leveraged speculative cross-border allocations, primarily focused on banks and, to a lesser extent, communications companies (telcos). [See returns of S&P 500 sector above] 

Further, the PSEi 30’s weekly breadth was overwhelmingly positive, with 19 of the 30 issues gaining and three remaining unchanged, averaging a 1.43% increase—almost mirroring the index’s actual weekly return of 1.44%. Two stocks, Meralco and Century Pacific Food (CNPF), hit all-time highs this week. (Figure 5, middle chart)

Weekly gains in the three banks contributed significantly to the PSEi 30’s performance. These banks accounted for 22.6% of the index, while the top five heavyweights—two of which are banks—commanded over half (50.83%) of the PSEi 30 as of October 18. (Figure 5, lowest pane) 

VII. Bank Borrowings in a Melt-UP Phase too! Conclusion

Before we conclude, as we await the PSE and the BSP to release September and Q3 data on individual banks and the overall banking system, it is noteworthy that some banks, such as PBCOM and PNB, have recently announced plans to raise funds through debt issuance in the capital markets.

Figure 6

It’s not just share prices that are surging—Philippine banks are also experiencing a sharp increase in borrowing—bonds and bills soared 32.3% in August. (Figure 6, topmost and middle graphs)

Why the rush to raise funds?

The answer lies in the ongoing deterioration of liquidity within the banking system, as indicated by declining cash-to-deposit and liquid-assets-to-deposit ratios. (Figure 6, lowest chart) 

The pressing question is: How will banks continue to fund the government under these conditions? The BSP’s response: Cut their Reserve Requirements, unleash liquidity! 

To wrap up, what you see in the media or mainstream discourse often doesn’t reflect the full picture. 

 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

 

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong—George Soros 

Was the ICT-Powered PSEi 30 Pump to 6,850 About the BSP’s Rate Cut or was it About Marcos-nomics Stimulus? (Short)

The ABS headline bannered, “PSEI back to 6,800 as investors cheer BSP rate cut.”

Figure 1

Well, the entire Asian equity market seems to have celebrated the rising expectations of rate cuts by the US Federal Reserve. In particular, 15 of the 19 national bourses closed 1.96% higher over the week. (Figure 1, upper chart)

The wonders of financial easing have also been manifested in strong rallies in the region’s bonds (falling yields) and firming currencies. The Thai baht, Indonesian rupiah and the South Korean won were this week’s strongest Asian FX. (Figure 1, lower image) 

Essentially, bad economic news is good news for the Overton Window anchored on speculative narratives. From their perspective, “MOAR” credit and leverage drive prosperity, hence the revival of various forms of leveraged speculation, such as the carry trade. 

Put differently, Main Street woes accrue to the benefit of the Wall Street class around the world. 

Has the Marcos-nomics Liquidity Driven Rally Broken the SONA Cycle?

Back home, while the BSP rate cut(s) has been worshipped by the establishment as the path to economic nirvana, the rallying PSE instead reflects the full rollout of “Marcos-nomics”—including the BSP’s easing—manifested through liquidity growth.

Figure 2

The PSEi 30 rallied by 3% for its second-best weekly showing of the year, mainly due to Friday’s 2.31% spike.

Sharp changes in liquidity conditions have influenced the PSEi 30 in a time-lag. (figure 2, upper graph) 

The liquidity-driven PSE may have broken the SONA cycle. (Figure 2) 

However, was the PSEi 30’s rally really about rate cuts? The devil is always in the details. 

PSEi 6,850: Targeted Heavy Pumps on ICT, ALI and a Select Few

Figure 3

This week’s rally was widespread across the PSEi 30, with 18 stocks rising, 11 declining, and one remaining unchanged. (Figure 3, topmost visual) 

However, it was ICTSI’s [PSE: ICT] massive 10.4% weekly surge that contributed significantly to the index’s performance. (Figure 3 middle chart) 

ICT's share of the free float-adjusted market cap of the PSEi 30 soared by 7.7% from 10.06% to an all-time high of 10.84%. It is closing in fast on the largest firm, SM, with a free float cap of 14.44%. 

Ayala Land's [PSE: ALI] 10.33% gain provided flanking support. Ayala Land's free float market cap also surged by 7.6% from 5.75% to 6.19%. 

The substantial rebounds of Jollibee (9.2%) [PSE: JFC] and Meralco (8.53%) [PSE: MER] helped too. Up 19%, Converge [PSE: CNVRG] was this week's best performer. However, from the free float market cap standpoint, their contribution remained negligible. (Figure 3 lowest graph)

Understanding the distribution of price changes in the PSEi 30's market cap provides significant insight into the price dynamics of the index.

For instance, while most people call the PSEi 30 the "market," an index with 5 issues driving it skews this holistic principle. As of August 16, the top 5 issues in the PSEi 30 carry a free float weight of 50%, while the top 10 account for 72.9%.

The fact that a few issues comprise the weightings of the PSEi 30 deforms the index's representation, making its price directional movements vulnerable to manipulation.

As a Global Company, ICT is Sensitive to Fed Actions; Debt Outgrows Income

Why would the investing public panic-bid on ICT shares when its revenues are principally derived from international sources? ICT is more exposed to the Fed's actions than the BSP's.

Figure 4

And why the parabolic price action when ICT’s debt is growing faster than its income? In H1 2024, ICT’s debt grew by USD 630.6 million against a net income expansion of USD 113.87 million, meaning that for every USD increase in net income, it drew USD 4.5 of credit. Consequently, interest payments have also surged. How sustainable is this? (Figure 4, topmost window)

Besides, ICT looks susceptible to adverse global events like a hard landing or a recession, as well as bellicose geopolitical developments.

Rate Cuts Driven Rally? Why the Divergence Between the Real Estate and Financials?

Interestingly, while banks and real estate are supposedly the prime beneficiaries of the BSP’s easing, BDO declined by 1.6%, and the relatively modest increases in Bank of the Philippine Islands [PSE: BPI] by 2.12% and Metrobank [PSE: MBT] by 3.7% led to a reduction in their share of the free float index.

On the other hand, ALI’s 10.33% spike, backed by SM Prime Holdings [PSE: SMPH] with a 3.4% gain, increased their index weight. The result is a divergence in the performance of interest-sensitive industries. (Figure 4, middle chart)

It’s not just the PSEi 30; members of the financial index (ex-PSE) and the property index also exhibit the same skew. Gains were seen in most constituents of the Property index (67%, average +1.47%) compared to the Financial index (42%, average all -.43%, average index -2.6%).  (Figure 4, lowest table)

Interestingly, the two PSEi 30 property firms account for 73.7% of the industry’s index, while the three banks comprise 90% of the 8-member Financial index (ex-PSE).

Distortions in Volume: Mounting Concentration Risks

Figure 5

The distortions are even apparent in trading volume. The rising share of ICT and the telcos (PLDT, Globe Telecoms, and Converge) in the mainboard volume has been accelerating, indicating intensifying speculative interest. Their share of the mainboard volume reached 22.25% in the week of August 16th, higher than their 2024 seven-month aggregate of 21.9%. (Figure 5, upper graph) 

Interestingly, despite the PSEi 30 at 6,850, weekly volume remained lackluster. That is to say, volume remained concentrated in PSEi 30 firms. The top 20 most active issues accounted for 84% of the main board volume. (Figure 5, lower chart)

Mixed Breadth, Foreign Inflows and More Signs of Concentrated Activities

Figure 6

And while the positive advance-decline prevailed at the PSEi 30 over the week, even with Friday's 134-68 differentials, breadth was barely positive (495-476) in favor of the buyers this week. (Figure 6, upper pane)

And yes, "foreign buying" indeed helped. PHP 1.44 billion of foreign inflows was reported for the week, while foreign participation accounted for 38.8% of the overall main board turnover.

The top 10 brokers also constituted 54.74% of the weekly mainboard volume.

All of this suggests that trades were hardly dispersed but rather concentrated, mainly among institutional brokers (domestic OFCs and foreign).

Or, the positive headlines may have misled the public to believe in whatever increases in the PSEi 30 means relative to the underlying activities.

Which History will Rate cut(s) Rhyme? 2011 or (2016) or the 2018 Episode?

Finally, as previously mentioned, unlike in 2011 and 2016, where rate cuts led the PSEi 30 to soar, 2018 saw the reverse—rate cuts led to a decline in the PSEi 30. Balance sheet conditions (public and private) played an important role in this difference. So far, the PSEi 30 appears to be following the 2016 pattern in its current run. Of course, Marcos-nomics stimulus could be the defining nuance.  (Figure 6, lowest chart)

Yet it will be interesting to see how lasting such low-volume parabolic pumps last.

Be careful out there.

 

Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed economy

 

Mega-politics tells us that people don’t always say what they want, know what they want, or get what they want. Instead, they think what they need to think... do what they want to do... and get what they deserve. And they end up where they ought to be... carried along by the deep currents of history—Bill Bonner

In this issue:

Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy

I. The Incredible Q1 2024 FOMO in the PSEi 30

II. The Two-Speed Economy: Q1 2024 PSEi 30 Firms Posted a Substantial Slowdown

III. Despite Tapering Financial Performance, Debt Absorption Increased for the PSEi 30

IV. Q1 2024 Consumer Slowdown: Decreasing Growth Rates in Retail Chains (Non-Construction and Food Services)

V. Q1 2024 Consumer Slowdown: Declining Sales Growth in the Midstream and Downstream Real Estate Industry

VI. The SSI Group's Fear of Missing Out (FOMO)

VII. The Financial Index’s Fear of Missing Out (FOMO)

VIII. Q1 2024 Financial Performance by Sector

IX. Q1 2024 Financial Performance by Members

X. San Miguel’s Debt Hit Php 1.44 Trillion as the Spike in Short-term Debt Has Exceeded the Firm’s Cash Reserve

XI. Summary and Conclusion

 

Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy

 

The financial performance of the PSEi 30 and its members and the economy have departed from the price actions of the PSEi 30. Why this is unsustainable.

 

I. The Incredible Q1 2024 FOMO in the PSEi 30

 

The principal Philippine equity benchmark, the PSEi 30, found an interim trough at the end of October 2023 and rallied until April Fool’s Day 2024.

 

The PSEi 30 returned 2.04% in Q4 2023 and 7.03% in Q1 2024. Better yet, the PSEi returned 15.8% from its provisional nadir on October 27, 2023, through the end of March 2024.

 

Has the panic bidding spree been justified in the context of the economy or corporate fundamentals?

 

First, Q1 2024 GDP posted a slower-than-expected 5.7%.

 

As we previously explained, despite the diminishing trend in consumer spending, the "money illusion" or the devaluation of the Philippine peso magnified net export contribution to GDP on the expenditure side.

 

At the same time, "financialization" or extensive gearing of the bank-led financial industry played a crucial role in the growth of the industry side of GDP. (Prudent Investor 2024)

 

How about the Q1 2024 performance of the nation’s elite firms?

 

Nota bene: 

 

-Older data, representing PSEi members of the specified Q1 end-of-period, presents an apples-to-oranges scenario. The PSEi periodically updates its constituents, which we labeled as 1A data.

 

-The older data also excludes data revisions.

 

-Current or 2023-2024 Q1 data provides a more accurate comparison as it reflects present members, labeled here as 1B data.

 

-The aggregates are overstated due to holding companies incorporating subsidiaries. (Prudent Investor 2024)

 

Here’s the summary of Q1 2024 YoY performance of the elite members of the PSEi 30.

 

II. The Two-Speed Economy: Q1 2024 PSEi 30 Firms Posted a Substantial Slowdown

 

-Using 1B, total revenues grew 8.3% or Php 129.64 billion

-Aggregate net income expanded by 6.5% or Php 14.92 billion

-Total cash reserves increased by 14.5% or Php 196.2 billion

-Published aggregate non-financial debt grew by 7.8% or Php 396.25 billion

Figure 1

 

The sectoral performance distribution table represents 1B. (Figure 1: topmost table)

 

Though revenue growth hit a record high in pesos compared to previous years (1A), Q1 2024 net revenue gains of Php 129.64 billion signified the smallest increase since 2021. (Figure 1: middle window)

 

The deceleration of revenue growth (1B) from 17.8% to 8.3% echoed the GDP. NGDP slowed from 14% in Q1 2023 to 8.8% in Q1 2024, while headline GDP eased from 6.4% to 5.7%. (Figure 1: lowest image)

Figure 2

 

Q1 2024 revenues-to-NGDP ratio hit 27.8%, the second highest in the last five years. If the GDP estimates are accurate, then the firms of PSEi 30 accounted for more than a quarter of the GDP.

 

Profits also took a breather. Net income growth dropped substantially from 20.6% in Q1 2023 to 6.5%, as reflected by the marginal differences, even as the net income aggregate hit a record high. (Figure 2, topmost chart)

 

That said, since the elite firms demonstrated a material slowdown in both revenue and income growth, this indicates that the GDP weakened more than the headline numbers suggest.

 

Self-evidently, the government was the primary beneficiary of the Q1 2024 5.7% GDP growth.

 

In other words, the government strengthened at the expense of the private sector.

 

III. Despite Tapering Financial Performance, Debt Absorption Increased for the PSEi 30

 

While the economy decelerated considerably, these firms worryingly gorged on more debt.

 

Non-financial debt expanded by 7.8% to a second all-time high of Php 5.48 trillion, a net increase of Php 396 billion (1A). The net peso increase fell slightly below Php 400 billion in 2022. (Figure 2, middle window)

 

The ratio of net non-financial debt to the PSEi net income surged from 12.8 in Q1 2023 to 26.6 in Q1 2024. Put another way, it required Php 26.6 of non-financial borrowings to generate Php 1 of income! This is assuming that the published bottom line is an accurate representation.

 

As a reminder, this buildup of debt excludes the banking sector. However, banks have utilized capital markets, particularly T-bills, to raise capital.

 

Last March, bond holdings of Philippine banks increased by 6.4%, while T-bills jumped 21.7%. The aggregate T-bill holdings of two PSEi 30 banks soared by 46.6%, or by Php 124.8 billion! (Figure 2, lowest graph)

 

To simplify, the PSEi 30 soared by 7% in Q1 2024, dismissing the risks of a slowdown as the economy continues to pile up leverage.

 

Incredible.

 

IV. Q1 2024 Consumer Slowdown: Decreasing Growth Rates in Retail Chains (Non-Construction and Food Services)

 

Nevertheless, the mounting strains on consumers were conspicuous.

 

Figure 3

 

While top consumer retail chains and property firms have been afflicted by decaying growth rates since 2022, Q1 2024 reinforced these underlying trends.

 

First, the non-food and construction retail chains.

 

SM retail’s revenue growth plunged from 10.6% in Q4 2023 to 2.7% in Q1 2024. Puregold sales increased from 5.3% to 6.7%, Robinsons retail slowed from 4.24% to 2.9%, Philippine Seven grew from 18.33% to 19.44%, SSI Group almost halved from 8.4% to 4.8%, but MRSGI expanded from 1.6% to 5.2%. (Figure 3, topmost image)

 

In aggregate, revenue growth slid from 8.23% to 5.1%, its slowest growth since 2021. Yes, revenue growth included the increased capacities from Q1 2023 to Q1 2024!

 

Next, the biggest food retail chains.

 

While growth improved marginally from Q4 2023, Q1 2024 reinforced the downtrend in sales growth of the largest food retail chains.

 

International sales pushed Jollibee’s aggregate sales higher from 8.4% in Q4 2023 to 11.3% in Q1 2024. AGI’s McDonald's posted slower growth, declining from 15.2% to 13.8%. Shakey’s sales growth more than halved, dropping from 16.22% to 6.3%, and the MAX Group suffered a revenue recession with two straight quarters of contraction at -0.14% and -2.1%. (Figure 3, middle window)

 

In aggregate, while sales growth of the four listed food retail firms increased from 9.3% to 10.9%, Q1 2024 signified the second slowest sales growth since 2021, largely driven by Jollibee’s dominant 77.5% share of the total.

 

Once again, this slowdown comes despite the added capacity!

V. Q1 2024 Consumer Slowdown: Declining Sales Growth in the Midstream and Downstream Real Estate Industry

 

How about the firms representing the downstream of the real estate industry?

 

Third, the leading home improvement and construction supplies retail chains, Wilcon Depot and All Home, also registered sales revenue growth recessions.

 

Despite store expansions, Wilcon posted -2.11% in Q4 2023 and -2.5% in Q1 2024. All Home likewise saw growth contraction of 5.0% and 5.5%. (Figure 3, lowest graph)

 

Rising accounts of vacancies were reflected in their sales.

 

Figure 4

 

Lastly, the biggest real estate companies.

 

Revenues of the top four real estate firms mirrored those of their consumer retail peers.

 

Sales growth of SM Prime Holdings dropped from 10.33% to 7.05%. While Ayala Land increased from 30.31% to 32.7%, smaller rivals Megaworld and Robinsons Land saw decelerations from 23.87% to 16.31% and 21.3% to 18.8%, respectively. (Figure 4, topmost chart)

 

Cumulative sales growth of the top four property firms slowed from 24.6% in Q1 2023 and 21.7% in Q4 2023 to 19.4% in Q1 2024.

 

VI. The SSI Group's Fear of Missing Out (FOMO)

 

Let me cite a specific example, a non-PSEi 30 issue.

 

While share prices of the largest high-end specialty retailer, the SSI Group, returned 68.3% in Q1 2024, ironically, sales growth year-over-year (YoY) eroded to 5.2% in Q1 2024 compared with 8.4% in Q4 2023 and 38.9% in Q1 2023. As such, net income dived 21.1% in Q1 2024, vis-à-vis the 4.5% growth in Q4 2023 and 573.4% in Q1 2023. (Figure 4, second to the highest and lowest graphs)

 

SSI expanded its stores from 516 in Q1 2023 to 534 in Q1 2024 (up 3.4%), supported by the increase in selling area from 99,597 sqm to 107,439 sqm (higher by 7.9%). SSI also increased its brands from 87 to 93 (up 7%).

 

Here is what they reported: “Sales during the 1st quarter of the year were impacted by the timing of the Easter holidays which occurred during the 1st quarter of this year, weaker spending, as more consumers traveled abroad, and the closure for renovation of one (1) Zara store, and the partial closure, also for renovation, of another Zara store, as well as by delayed deliveries for one of our larger footwear brands.” (PSE, 2024) [bold added]

 

Amazing rationalizations.

 

In any case, have the wealthy embraced parsimony?

 

So, riding on the FOMO (Fear of Missing Out) momentum from what seems like an orchestrated pump on the PSEi 30, speculators manically bid up on SSI shares, paving the way for increasing maladjustments between prices and its Q1 financial performance.

 

SSI plunged 10.6% this week, a day after its announcement (and after my tweet).

 

VII. The Financial Index’s Fear of Missing Out (FOMO)

 

More importantly, a similar displacement from the FOMO phenomenon has plagued the banking system.

 

Since the acme of 2022, the industry’s profit growth rate has steadily declined. It was up by only 2.95% in Q1 2024, down from 13% in Q4 2023 and 34.97% in Q1 2023 (let us close our eyes on their record Held-to-Maturity HTM holdings). (Figure 4, lowest graph)

 

Yet, the financial index soared by 12.4% YoY in Q1 2024 and 17% on YTD last March. As it stands, the index reached a 6-year high!

 

Even better, the three biggest banks of the PSEi 30 delivered a 17% net income growth in Q1 2024, a smidgen compared to the 40.9% in Q1 2023.

 

Strikingly, their PSEi 30 free float market cap weighting stormed to 21.3% at the end of March, an all-time high, and further expanded to a historic 22.8% at the week ending May 3rd.

 

As in the past, were the Other Financial Corporations (OFC) responsible for this?

 

Importantly, were such actions at the behest of financial authorities to impress upon the public the supposed "soundness" of the banking system?

 

The thing is, because "markets" have been running ahead or deviating from their fundamentals, this melt-up can be reckoned as "unsustainable."

 

Nonetheless, the partial divergence between corporate performance and GDP, on the one hand, and the surge in share price returns and actual corporate results, on the other, reflects the mounting distortions in market pricing caused by the BSP’s monetary and regulatory policies, as well as regulatory lapses in containing repeated attempts to manage market prices by undisclosed entities with likely access to depository accounts.

 

The deepening mispricing of the stock market exacerbates financial instability and market fragility, which could have severe economic repercussions.

 

VIII. Q1 2024 Financial Performance by Sector

 

By sector, financials and the property sector registered the fastest sales growth at 26.9% and 20.5%, respectively. (Figure 1, topmost table)

 

Nonetheless, holding firms and financials led the growth in the peso, with Php 68.9 billion and Php 32.7 billion, respectively.  The same industries accounted for the largest share (in net gains) of the total with 53% and 25.2%, correspondingly.

 

The property and financial sectors also reported the swiftest net income growth at 22% and 17.1%, respectively. However, financials and services recorded the largest peso gains—Php 6.73 billion and Php 3.7 billion, respectively. Financials and services held the biggest shares at 45% and 24.5%, respectively.

 

While all non-financial sectors experienced similar growth rates of over 7%, holding firms accounted for the largest borrowings at Php 267.5 billion, followed by services at Php 59.1 billion.

 

In the meantime, the holding firms and services also saw the most significant net gains in cash reserves, with Php 94.1 billion and Php 30.05 billion, respectively.

It's likely that their substantial borrowings contributed to this surge in cash reserves.

IX. Q1 2024 Financial Performance by Members

Figure/Table 5

Among members of the PSEi 30, San Miguel Corporation recorded the largest net revenue increase of Php 46 billion, followed by JG Summit with Php 14.5 billion. In contrast, Aboitiz Equity experienced the largest sales contraction of Php 6.8 billion. Twenty-two of the 30 PSEi members posted net revenue increases in Q1 2024.

 

JG Summit and Converge reported the highest net income growth in pesos, with Php 6.849 billion and Php 3.393 billion, respectively. Conversely, San Miguel Corporation posted the largest deficit of Php 8.85 billion. Twenty-one of the 30 PSEi members saw increases in net income.

 

Meanwhile, LT Group and Meralco recorded the largest cash increases, with Php 69.945 billion and Php 36.6 billion, respectively, while Aboitiz Equity accounted for the largest deficit of Php 16.9 billion. Nineteen of the 30 PSEi members experienced increases.

In contrast, San Miguel, Ayala Corp, and Aboitiz Equity reported the highest debt increases, amounting to Php 162.76 billion, Php 36.2 billion, and Php 33.2 billion, respectively.

 

Eighteen of the twenty-seven non-financial firms reported increases in debt. San Miguel accounted for 41.08% of the Non-Financial’s Php 396.3 billion total.

 

The crux: What happened to the BSP’s monetary policies? Why the sustained rapid debt expansion?

 

X. San Miguel’s Debt Hit Php 1.44 Trillion as the Spike in Short-term Debt Has Exceeded the Firm’s Cash Reserve

Figure 6

Despite a slight drop in interest expense, San Miguel Corporation’s debt skyrocketed to an electrifying Php 1.441 trillion in Q1 2024! (Figure 6, upper chart)

 

Meanwhile, SMC’s interest coverage ratio (ICR) fell to 1.6, its second-lowest Q1 ratio since 2020.

 

In this context, SMC’s debt levels accounted for 4.6% of the Philippines' total financial resources—its third-highest level—indicating a heightened concentration of leverage and systemic risk, akin to being "Too big to fail."

 

The surge in short-term debt relative to the firm’s declining cash reserves in Q1 2024 has led to the widest spread in San Miguel’s history.

 

Essentially, this is symptomatic of SMC’s escalating liquidity challenges, necessitating the firm to draw more liquidity from its internal finance and the financial system by borrowing more. SMC intensified its borrowing in 2021 and 2022 in response to the lowest ICR in 2020, and it's likely to continue this trend in the coming quarters.

 

It's crucial to understand that "what happens to San Miguel wouldn’t stay in San Miguel." As a systemic risk, SMC’s debt challenges can easily magnify into a ripple effect—or the intensifying risk of financial and economic contagion.

 

XI. Summary and Conclusion

 

In the end, the loosening of financial conditions has led to an increasing divergence between corporate share prices and fundamentals.

 

Furthermore, the PSEi 30’s Q1 2024 financial performance demonstrates a two-speed economy: a private sector slowdown, which has even affected the elites, translating to further hardship for the middle and lower classes, and a booming government.

 

___

References:

 

Prudent Investor Newsletters, Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness May 12, 2024

 

Prudent Investor Newsletters, Analyzing the 2023 Performance of the Philippine PSEi 30 Constituent Firms, May 5, 2024

 

SSI Group Q1 17-Q, May 15, 2024, pse.com.ph