Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

 

If you depreciate the money, it makes everything look like it’s going up – Ray Dalio 

In this issue: 

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment

I. Nota Bene—Data Revision and Structural Divergence

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal

III. The Wile E. Coyote Phase: Optics in Motion

IIIA. Broad-Based Plateauing Across Core Sectors

IIIB. Liquidity Redirected, Not Transmitted

IIIC. The NPL Paradox

IIID. Duration Losses Surface First

IIIE. The Redistribution of Strain

IIIF. Reserve Cuts: Policy Choreography in Motion

IIIG. Late-Cycle Containment

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion 

Liquidity Without Output II: The Philippine Banking System Under Late-Cycle Containment 

Stability by Refinancing: The Philippine Banking System Under Containment 

I. Nota Bene—Data Revision and Structural Divergence 

The BSP revised December’s currency-in-circulation growth from 17.7% to 6.4%. This does not alter the central observation: liquidity creation at the monetary authority level continues to exceed the pace of circulation in the broader economy, which highlights the opacity of late-cycle aggregates. The argument herein rests on persistent balance-sheet divergence, or that stability is maintained through optics rather than fundamentals. 

II. Acceleration Without Circulation; Containment and Redistribution

IIA. When Banks Absorb What the Economy Will Not 

Liquidity is not only rising — it is accelerating again. Money supply is trending higher. Policy rates have been cut. Reserve requirements have been reduced. Deficit spending has widened toward levels last seen during the pandemic. Yet GDP growth has slowed markedly: Q4 2025 expanded just ~3 percent year-on-year, bringing the full-year growth to ~4.4 percent, the slowest post-pandemic pace outside the crisis period. 

When liquidity expands as output contracts, the question is no longer about stimulus. It is about containment — and about who ultimately absorbs the risk.

Figure 1

In our previous post, we noted that the BSP’s currency issuance — or currency in circulation on the central bank’s books — surged by initially reported ~17.7 percent in December to a historic Php 3.205 trillion (Php 2.897 trillion revised).  (Figure 1, topmost and middle charts) 

In the same month, however, currency outside depository corporations — the stock of cash actually held by the public — grew only ~6.6 percent to Php 2.522 trillion. The gap between issuance (as captured in the Monetary Authorities Survey) and circulation outside banks (as captured in the Depository Corporations Survey) is the widest on record. 

This unprecedented growth differential signals a breakdown in monetary transmission. Liquidity is being created at the central bank level, yet it is not translating into proportional expansion of cash held by the public. Instead, it is accumulating within the banking and sovereign balance-sheet perimeter. 

IIB. Rising Monetary Aggregates, Mounting Systemic Leverage 

Despite the revision, broad money and financial system leverage metrics have pivoted higher. (Figure 1, lowest image) 

Monetary aggregates (M1 and M2) and domestic claims relative to GDP moved back up in Q4, reaching roughly 70.4 percent, 71.8 percent, and 80.6 percent, respectively — levels consistent with tighter financial balance-sheet conditions. 

Domestic claims, which include net claims on the central government (NCoCG) and claims on other sectors, broadly measure credit leverage within the financial system. 

In 2025, lending to the government accounted for ~27.2 percent of total claims (slightly higher than in 2024), while lending to the private sector was ~72.8 percent (slightly lower than in 2024), even as overall claims rose ~10 percent YoY and M1/M2/M3 expanded by 7.1 percent, 7.5 percent, and 7 percent YoY, respectively. 

IIC. Fiscal Backstopping at Pandemic Scale, Financial Market Signals: Liquidity Without Conviction 

Fiscal metrics underscore the scale of backstopping. As of end-November 2025, the national government’s budget deficit reached ~Php 1.26 trillion for the first eleven months — second only to the pandemic year 2020 on a cumulative basis, and representing ~81 percent of the government’s full-year Php 1.56 trillion target. Total revenues rose modestly, while expenditures continued to outpace them, driving the gap. 

Figure 2 

The impact of accelerating liquidity is increasingly visible in financial markets. 

The PSEi 30 has rallied alongside higher turnover despite slowing GDP, while the yield curve has steepened at the front even as long-end yields remain elevated — suggesting that liquidity is facilitating issuance absorption and duration risk transfer rather than signaling stronger real-economy prospects.  PSE & PSEi chart data based on original MAS data. (Figure 2, topmost and second to the highest windows) 

Philippine Treasury market turnover reached record levels in 2025. But volume alone is an incomplete signal of improved confidence. High turnover can reflect repositioning, dealer balance-sheet management, policy alignment, geopolitical shock absorption, or constrained domestic savings with limited real-economy outlets. (Figure 2, second to the lowest image) 

The curve matters more than the prints: its slope embeds term premium, duration appetite, and credibility. (Figure 2, lowest diagram) 

If confidence were broad-based and durable, normalization would occur across tenors. Instead, activity remains selective, slopes unstable, and duration demand cautious—liquidity without conviction. 

Across equities, fixed income, and foreign exchange, the pattern is consistent: liquidity is sustaining financial asset turnover while real-economy transmission weakens 

IID. Peso Dynamics: Stability Through Management; MAS vs. DCS: Divergence as Structural Signal 

The peso tells a similar story. Periodic strength has coincided with weak-dollar phases and sovereign borrowing inflows, yet the underlying savings–investment gap and elevated fiscal financing requirements continue to exert structural pressure. 

The Philippine government raised approximately USD 2.75 billion from global capital markets in January. 

Over the past weeks, USD/PHP has fallen from its record highs to test the 58 level. 

Exchange-rate stability appears less a reflection of external balance improvement than of active liquidity management and capital flow support. 

A key structural signal lies in the growing divergence between the BSP’s Monetary and Financial Statistics (MAS) and the Depository Corporations Survey (DCS). The MAS consolidates the central bank’s balance sheet plus the national government’s monetary accounts, including direct currency issuance and central bank operations. The DCS, by contrast, consolidates the balance sheets of the BSP and all other deposit-taking institutions (commercial banks, thrift banks, rural banks, etc.), presenting money supply and credit aggregates after eliminating intra-system holdings. This methodological difference means the MAS can register rapid currency issuance that does not immediately appear in the broader economy’s cash circulation as captured by the DCS — a gap that has rarely been this wide. 

This divergence — excess monetary creation not translating into commensurate growth in broad money or real economic activity — reflects a balance-sheet recession dynamic, where traditional monetary accommodation fails to circulate through productive economic channels. 

As banks and firms prioritize balance-sheet repair over fresh productive lending, excess liquidity remains trapped within the financial system. Consistent with Hyman Minsky’s financial instability hypothesis and Richard Koo’s balance-sheet recession framework, monetary accommodation increasingly sustains asset turnover and duration/risk transfer rather than output, employment, or external balance improvement. 

III. The Wile E. Coyote Phase: Optics in Motion 

December’s banking data do not depict stabilization. They depict redistribution. 

Slower lending growth emerged despite a string of interest rate cuts — a development even the mainstream press finally acknowledged. 

Universal and commercial bank lending (net of repos) rose 9.2% year-on-year in December — the softest expansion since February 2024’s 8.6%. 

The news pointed to a 5.4% contraction in lending to construction firms, attributing the slowdown to reduced public spending. But construction represents only 3.7% of total bank exposure. It cannot explain system-wide deceleration. 

The drivers were broader — and deeper. 

IIIA. Broad-Based Plateauing Across Core Sectors 

Three major sectors — accounting for roughly 42% of total bank portfolios — drove the slowdown. 

• Manufacturing (8.6% share) contracted 9.43% year-on-year in December, its seventh consecutive monthly decline and the second-deepest contraction since September 2025’s 10.44% drop. 
• Real estate (≈20% share) — the system’s largest borrower — slowed to 8.3% growth, its weakest pace since October 2023. 
• Consumer lending (13.5% share) — previously the fastest-growing segment — decelerated to 21.4%, the slowest since September 2022. This follows an extraordinary 33-month streak of growth exceeding 22%. 

This is not marginal noise.

Figure 3

Credit expansion appears to be plateauing across its core engines, as bank lending to both the production sector and households shows signs of inflection. (Figure 3, topmost pane) 

Meanwhile, GDP growth has slowed for two consecutive quarters — from 3.95% in Q3 to 3% in Q4. (Figure 3, middle image) 

Rate cuts were marketed as stimulus. Yet lending momentum peaked as output weakened. 

IIIB. Liquidity Redirected, Not Transmitted 

As lending to the general economy softened, activity within the financial system intensified.

Interbank lending and reverse repurchase transactions (with both the BSP and other banks) surged toward milestone highs. (Figure 3, lowest graph)

Figure 4

Bank borrowings from capital markets jumped 17.3% to an all-time high of Php 1.96 trillion, largely reflecting bond positioning. Bills payable also rose to one of the highest levels on record. (Figure 4, top and second to the highest images) 

Net claims on the central government increased 10.8% to a fresh record of Php 6.135 trillion. Duration exposure deepened. (Figure 4, second to the lowest diagram) 

Yet Held-to-Maturity (HTM) securities increased only modestly (+1.2% YoY), despite the BSP’s reclassification of these instruments under “debt securities net of amortization.” 

Risk did not disappear — it moved.

Despite liquidity injections, bank cash balances contracted 19.5% year-on-year in December.

Cash-to-deposit and liquid-asset-to-deposit ratios improved slightly but remain strategically low. (Figure 4, lowest visual) 

System liquidity appears abundant in headline aggregates. 

At the transactional margin, it is thin.

IIIC. The NPL Paradox

Figure 5 

Non-performing loans had been rising alongside slowing GDP through Q3. 

In November, they softened modestly. In December, they fell sharply. (Figure 5, topmost and middle graphs) 

Gross NPLs declined in peso terms — not merely as a ratio effect — even as output had weakened for two consecutive quarters. While year-end charge-offs, restructurings, and classification adjustments can produce seasonal improvements, the magnitude of the drop contrasts with deteriorating macro conditions. 

Either borrowers experienced an abrupt recovery amid a slowdown — or recognition dynamics shifted. 

There are only a handful of mechanical pathways through which NPL ratios decline in such an environment:

• Restructurings
• Charge-offs
• Denominator expansion
• Regulatory relief
• Classification effects 

The burden of proof shifts to fundamentals. 

IIID. Duration Losses Surface First 

While credit metrics improved optically, market losses intensified. 

In December, Available-for-Sale (AFS) securities expanded 22% and now account for roughly 45% of financial assets, rapidly approaching Held-to-Maturity’s 48% share. (Figure 5, lowest chart)

Figure 6

Despite generally easing Treasury yields, financial investment (accumulated) losses surged in December from Php 1.98 billion in November to Php 20.16 billion. (Figure 6, topmost pane) 

For Q4, losses on financial assets reached Php 42.396 billion — the third consecutive quarter exceeding Php 40 billion — levels previously seen only during the pandemic recession. (Figure 6, middle diagram) 

Full-year 2025 financial asset losses totaled Php 159.7 billion, materially weighing on profitability. Banking system net income growth slowed sharply: Q4 net income declined 0.78% year-on-year, while full-year 2025 profit growth decelerated to 3%, down from 9.8% in 2024. 

From Q3 to Q4, return on assets (ROA) decreased from 1.46% to 1.41%, and return on equity (ROE) declined from 11.71% to 11.46%, suggesting both measures may be beginning to trend downward. (Figure 6, lowest chart) 

The pressure came less from exploding credit costs than from market volatility. This is not synchronized improvement. It is stress migration.

IIIE. The Redistribution of Strain 

When securities losses rise, repo dependence increases, sovereign absorption intensifies, liquidity buffers remain fragile — yet NPL metrics improve abruptly — the pattern is not stabilization.

It is reallocation. 

Late-cycle systems often preserve surface calm by shifting where strain appears:

• Duration losses surface before credit losses.
• Market volatility compresses earnings before defaults spike.
• Provisioning pressure eases as classifications adjust.
• Headline ratios improve even as balance sheets stretch. 

This is the AFS Wile E. Coyote dynamic accelerating. The system appears suspended — supported by liquidity, refinancing structures, sovereign absorption, and accounting elasticity — even as underlying cash-flow conditions soften. 

Stability is maintained through motion, not repair.

IIIF. Reserve Cuts: Policy Choreography in Motion 

In February 2026, the BSP cut reserve requirements across bank-issued bonds, mortgage instruments, and trust accounts. Reserves on bonds fell from 3% to 2% for universal and commercial banks; thrift banks saw their 6% requirement scrapped; long-term negotiable deposits lost their 4% ratio; and most strikingly, trust and fiduciary accounts dropped to zero from double-digit levels. 

The BSP framed the move as liquidity-neutral, but the timing betrays intent: this was balance-sheet relief, not growth. Banks absorbing securities losses, repo dependence, and sovereign absorption were granted regulatory breathing room. 

This is choreography, not repair. Reserve cuts thin liquidity buffers to ease optics, shifting fragility from bank balance sheets into the broader system. Once again, containment through redistribution, not stabilization. 

IIIG. Late-Cycle Containment 

This pattern aligns with Minsky’s late-cycle stabilization phase: fragility becomes politically and financially intolerable, prompting increasingly active management of volatility and balance-sheet optics. Stability is no longer organic — it is administered. 

It also echoes Kindleberger’s late-cycle dynamics, where imbalances are contained and recognition deferred. Transparency thins. Risk redistributes. The system appears calm — until price signals overwhelm narrative control. 

It resembles Kornai’s soft-budget constraint dynamic: losses are socialized, recognition deferred, discipline diluted. 

The system is being managed. 

But when liquidity sustains refinancing more than output, when duration risk migrates faster than credit risk, and when monetary aggregates expand faster than money circulating in the real economy, the adjustment rarely announces itself through ratios.  

It accumulates quietly on balance sheets. Then it emerges through prices — often abruptly. 

And economics does not yield to optics.  

IIIH. Concentration, Price Discovery, and Balance-Sheet Feedback

Figure 7

The Philippine financial system is highly concentrated. Banks control roughly 83.1% of total financial assets, with universal and commercial banks accounting for about 77.4% (as of December 2025). (Figure 7, upper chart) 

At the same time, the PSEi 30 is itself concentrated in a handful of large-cap names. 

Since 2024, the top five heavyweights have accounted for over 50% of the index weight. This concentration has been led by ICTSI, which not only surpassed former leader SM Investments but, through a string of record highs, has pushed its weight in the PSEi 30 to over 18%— a single issue now accounts for nearly one-fifth of the headline index’s performance! (Figure 7, lower graph) 

In such an environment, late-session flows (“afternoon delight” or “pre-closing” activity) into a small number of index-heavy stocks can have disproportionate effects on headline market performance. Whether driven by liquidity management, portfolio rebalancing, balance-sheet considerations, or index performance objectives, this clustering of activity near the close raises questions about the quality and integrity of price discovery. 

This is not merely a capital markets issue. 

When asset prices become reference points for macro stability—and when large financial institutions sit at the center of both credit creation and market intermediation—price management, volatility smoothing, and liquidity containment can feed back into balance sheets. 

The result is a reflexive loop: 

• Market stabilization supports balance-sheet optics.
• Balance-sheet stability reinforces the narrative of macro resilience.

But when stabilization becomes a policy objective—whether in equity indices, exchange rates, or the yield curve—intertemporal trade-offs accumulate. 

Those trade-offs do not disappear. They re-emerge in funding structures, duration exposure, and income volatility—and ultimately in market volatility. 

IV. Conclusion Regime Recognition: Liquidity as Containment, Not Expansion 

What we are observing is not a conventional stimulus cycle. It is a containment cycle. 

• Liquidity is growing — but circulation is narrowing.
• Credit is refinancing — but not compounding productive output.
• Market turnover is rising — even as real growth decelerates. 

This is consistent with the balance-sheet recession dynamic outlined previously: private sector caution meets public sector duration absorption, while monetary aggregates expand within the institutional perimeter. 

In such a regime, risk does not disappear. It migrates. 

• Credit risk becomes duration risk.
• NPL ratios improve through denominator expansion.
• Volatility compresses through active management. 

But arithmetic remains.

When liquidity sustains rollover more than real investment, growth slows even as balance sheets expand. And when duration risk concentrates faster than income growth, the system becomes increasingly sensitive to price signals rather than flow indicators. 

The adjustment, when it comes, is rarely triggered by one dramatic data release. It emerges when price discovery outpaces narrative control. 

That is late-cycle dynamics. 

Policy stimulus eventually fails not because liquidity stops expanding — but because the real capital base can no longer validate the financial claims built upon it. 

Narratives may shape perception, but only economics compounds 

____

Reference: 

Prudent Investor Newsletter, Liquidity Without Output: The Balance-Sheet Recession Behind the Philippines’ Q4 and 2025 GDP Slowdown, Substack, February 08, 2026

 

 

 

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

 

The reality is, if we tell the truth, we only have to tell the truth once. If you lie, you have to keep lying forever—Rabbi Wayne Dosick 

In this issue

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress

I. GDP Shock, the PSEi 30 Barely Blinks

II. Liquidity-Led Asian Bull Run—The Philippines Tags Along

III. What the PSEi 30 Shows—and What It Conceals

IV. The Five-Minute Market: January 30

V. Index Output vs. Concentrated Reality

VI. ICTSI: The PSEi 30’s Silent Underwriter

VII. Concentration Risk Is Not Easing—It’s Shifting

VIII. Liquidity Concentration Remains Entrenched

IX. Manufactured Gains, Accumulating Fragility

XI. Mining–Oil Resurrection: Performance at the Margins, Volume Tells the Real Story

X. Expect a Pullback from the Overbought Mining-Oil Index

XI. When GDP Breaks, the PSEi 30 Follows

XII. Easy Money Fails—Again and Again!

XIII. The Pro-Cyclical Politics of Market Participation; Lessons from the 1994 GSIS–SSS Stock Loan Programs

XIV. PERA: Risk Transferred, Not Eliminated; When Loss Absorption Becomes a Policy Fault Line

XV. Philippine Peso Stress Is the Signal, Not the Noise

XVI. Trump’s Weak Dollar Policy: A Temporary Reprieve—Not a Resolution

XVII. From Gaming the Index to Gaming the Curve

XVIII. Macro Stability as Policy Objectives of Yield Curve Interventions

XIX. The PSEi 30 as Collateral Infrastructure

XX. Conclusion: January’s PSEi 30’s Performance: Not A Vote Of Confidence—But A Managed Outcome 

The PSEi’s January Mirage: GDP Slumps as Liquidity, Curve Control, and Index Engineering Mask the Stress 

Why Philippine equities rose as GDP, the peso, and credibility deteriorates

I. GDP Shock, the PSEi 30 Barely Blinks 

Figure 1

In a week when Philippine authorities announced yet another growth shock—GDP slowing further from a revised 3.9% in Q3 to just 3.0% in Q4 2025—the domestic headline equity index closed the week down a negligible 0.07%. (Figure 1, upper table) 

For full-year 2025, GDP growth decelerated sharply to 4.4%, from 5.7% in 2024—a material slowdown that we will examine in detail in a separate post. 

Yet markets barely reacted. 

Despite deteriorating macro fundamentals, January’s performance pushed the PSEi 30 up 4.56% month-on-month (MoM) and 7.96% year-on-year (YoY), its strongest combined MoM and YoY showing since September 2024. 

On the surface, the Philippine equity market appeared resilient—almost indifferent—to worsening growth data. 

II. Liquidity-Led Asian Bull Run—The Philippines Tags Along 

This performance placed the PSEi 30 alongside most easy-money-driven Asian equity markets, many of which extended their 2025 bull runs into the first month of 2026. 

According to Bloomberg data, 16 of 19 major Asian indices ended January higher, with an average gain of 4.7%. South Korea’s tech-heavy KOSPI led the surge, climbing nearly 24% in January and touching successive record levels. Other markets—including Singapore, Taiwan, Indonesia, Pakistan, and Sri Lanka—also carved out new highs. (Figure 1, lower graph) 

In this context, Philippine equities benefited from the regional liquidity tide. But the PSEi 30’s gains tell only part of the story. 

III. What the PSEi 30 Shows—and What It Conceals 

Media commentary has largely attributed January’s index strength to optimistic domestic narratives, while blaming external forces and corruption for lingering weaknesses (self-attribution bias). 

What has been almost entirely ignored is how index construction, free-float weighting, and trading mechanics materially shape reported performance. 

The public remains largely uninformed about how a small cluster of heavyweight constituents—rather than broad-based participation—drives index outcomes. 

January 30 offers a textbook example. 

IV. The Five-Minute Market: January 30  

Figure 2

On January 30, the PSEi 30 jumped 1.7% in a single session. But roughly 87% of that gain occurred during the five-minute pre-closing (floating) period, not during continuous trading!  (Figure 2, topmost window) 

Banks—particularly BPI—were central to this move. 

BPI was down 0.27% heading into the pre-closing phase. During the runoff, however, the stock reopened nearly 9.73% higher—effectively a 10% spike!! (Figure 2, middle image) 

This unusually large end-of-session repricing almost single-handedly altered the index outcome. 

Other major beneficiaries:

• BDO (+1.96%)
• Metrobank (+2.82%)
• SM Investments (+0.96%)
• Ayala Land (+1.43%) 

All were among the top 10 stocks by free-float market capitalization. 

In a wink of an eye, January’s "outstanding" index performance was successfully locked in. 

V. Index Output vs. Concentrated Reality 

This divergence becomes clearer when decomposing returns. 

The average month-on-month return of PSEi 30 component stocks was only 2.86%, and 2.85% on a full market-cap basis—well below the index’s 4.56% headline gain. (Figure 2, lowest diagram) 

Why the gap? 

Because the most significant contributions came from free-float-weighted gains concentrated in a handful of names—led principally by ICTSI, and reinforced by BPI, Ayala Corp, Metrobank, and Meralco. As of January 29, these five stocks accounted for 39.7% of the index’s free-float market capitalization. 

VI. ICTSI: The PSEi 30’s Silent Underwriter

Figure 3

The PSE’s largest constituent, ICTSI, has been racing toward successive record highs throughout January. This performance is magnified by its free-float weight of 17.82%, an all-time high as of January 29th. (Figure 3, topmost pane) 

In practical terms, ICTSI has bankrolled the PSEi 30’s returns since 2024. 

With approximately 55% of the Services sector’s full market capitalization, ICTSI has been primarily responsible for the sector’s 8.7% MoM and 33% YoY gains. 

Sectoral strength, in this case, is less a reflection of broad economic vitality than of single-firm dominance amplified by index mechanics. 

VII. Concentration Risk Is Not Easing—It’s Shifting 

Interestingly, despite ICTSI’s outsized role, the combined weight of the top five index constituents appears to have peaked. After reaching a record 53.02% in mid-December, their share eased slightly to 51.64% by January 29th. (Figure 3, middle chart) 

This can be read in two ways: 

One. A welcome broadening of gains beyond the largest names, or

Two. A growing vulnerability stemming from the index’s continued dependence on a narrow elite—increasingly dependent on tactical flows rather than structural diversification. 

At this stage, trading behavior suggests the latter interpretation is more consistent with reality. 

VIII. Liquidity Concentration Remains Entrenched 

January trading data reinforces this conclusion. 

The top 10 brokers accounted for an average of 61.5% of daily main board volume, down marginally from 63.5% in December. (Figure 3, lowest visual) 

On a weekly basis, however, this concentration trend has been rising steadily since the second half of 2025. 

Meanwhile, the top 10 traded issues represented 58.8% of daily volume, down from 65% in December. 

These are modest improvements—but they do not alter the core reality: trading activity remains heavily concentrated among a small group of players and stocks, who, in turn, shape index outcomes. 

IX. Manufactured Gains, Accumulating Fragility 

Taken together, January’s performance was not the product of broad-based confidence or improving fundamentals. It was manufactured through index construction, free-float concentration, and strategically timed flows—particularly during thin post lunch trading, pre-closing and runoff windows. 

While the gains appear orderly on the surface, the risk concentration embedded within the PSEi 30 is reticently intensifying. This fragility is neither well understood nor adequately discussed—yet it defines the true state of the market far more than the headline index level ever could. 

X. Breadth Confirms Concentration, Not Strength 

There is more evidence that January’s headline gains masked a deeply concentrated market.

Figure 4 

Despite the PSEi’s strong January performance, market breadth barely improved. 

The advance–decline spread widened by only 30 issues, a stark contrast to 2023’s spread of 184, when the PSEi posted a more modest 3.45% YoY gain—yet still ended that year down 1.77%. (Figure 4 topmost window) 

In other words, stronger index performance today is being achieved with far weaker participation. 

XI. Mining–Oil Resurrection: Performance at the Margins, Volume Tells the Real Story 

A significant contributor to January’s gains came from the Mining and Oil sector, riding the surge in global metal prices. 

The sector’s 10-component index jumped 25.8% MoM and an extraordinary 175% YoY, off a deeply depressed base. Unlike 2006–2012, miners are not just outperforming but decisively diverging from the PSEi 30. (Figure 4, middle image) 

Volume followed performance. Mining turnover surpassed that of the once-favored (PLUS and BLOOM) gaming stocks—higher by 18% in January. Yet, PLUS fell 19.01% MoM, BLOOM rose 12.6%, and Philweb surged 56.3%—a clear signal of institutional preference for high-volatility, high-beta trades. (Figure 4, lowest diagram)

This divergence highlights an uncomfortable reality: capital is rotating not toward fundamentals, but toward popular narratives, leverage and momentum.

The Mining sector’s share of main board volume surged to 7% in January, contributing materially to the 33.6% YoY increase in the PSE’s main board volume and the 36.5% rise in total/gross market turnover. Cross transactions accounted for 17.3% of MBV. 

Meanwhile, the Property sector’s share of gross turnover rose to 21.7% from 18.74%, while Holdings increased to 15.26% from 14.21%. Property had negative returns (-3.43% MoM, -.26 YoY) while holdings were buoyed (+4.86 MoM, +2.25% YoY) 

Together, these shifts reinforce a widening divergence between mainstream index performance and the previously shunned, cyclical, or politically unpopular sectors, particularly mining and oil. 

We have long anticipated the sector’s revival, and recent performance has clearly validated our call. 

But wait… 

X. Expect a Pullback from the Overbought Mining-Oil Index 

Though we expect the mining index to endure a sizeable pullback from their overextended, overbought levels—no trend moves in a straight line—this does not negate the broader regime backdrop supporting the sector. 

A growing set of global structural risks consistent with a potential regime transformation—manifested in a deepening war economy, the weaponization of the dollar, sanctions, protectionism, fiscal dominance, persistent central bank easing, and widening geopolitical tensions—should place a cap on any sustained decline. 

In this context, we should also expect partial rotation within the complex, particularly from metals toward oil-gas, rather than a wholesale reversal of the trade. 

XI. When GDP Breaks, the PSEi 30 Follows 

Despite the apparent regularity of post–lunch recess rallies—what I have previously labeled "afternoon delight"—and the repeated appearance of coordinated large-cap based "pre-closing" pumps (and dumps), the PSEi 30 has historically tracked GDP trends, albeit with a lag.

Figure 5

The most recent upside cycle began in mid-November 2025 and appears to have peaked by mid-January 2026. Notably, the index remained conspicuously indifferent to the Q4 GDP collapse, as if the slowdown had already been discounted—or managed. (Figure 5, topmost window) 

History suggests otherwise. 

At the onset of BSP rate cuts in August 2024, the PSEi surged nearly 15%, as easing was sold as a growth elixir. That optimism proved short-lived. (Figure 5, middle graph) 

GDP slowed sharply from 6.5% in Q2 2024 to 5.2% in Q3, barely stabilized in Q4, and was followed by a 10.5% PSEi plunge in Q1 2025. 

By Q3 2025, GDP had deteriorated further to 3.9%, and the PSEi collapsed another 18%. 

This pattern is not accidental. 

XII. Easy Money Fails—Again and Again! 

It bears repeating: RRR cuts, policy rate easing, expanded deposit insurance, and persistent fiscal stimulus—including pandemic-era deficits—have NOT revived growth. (Figure 5, lowest chart) 

As history has shown, they have accompanied or worsened economic deceleration. 

Yet the mainstream narrative insists these tools are the only solution.

Figure 6

The same logic is now being applied to equities: more liquidity, more intervention, more management of outcomes. (Figure 6, topmost diagram) 

Ironically, rather than igniting a genuine bull market, the PSEi increasingly requires non-market interventions to manufacture the appearance of macro stability. 

XIII. The Pro-Cyclical Politics of Market Participation; Lessons from the 1994 GSIS–SSS Stock Loan Programs 

Aside from direct market interventions, the politics of engineering a bull market have evolved.

Beyond the Capital Markets Efficiency Promotion Act (CMEPA)—which we have repeatedly criticized—the mainstream has revived proposals reminiscent of the defunct GSIS–SSS stock loan programs to further stimulate retail participation. 

These initiatives, however, reflect fundamentally pro-cyclical policymaking. 

The GSIS and SSS stock loan programs—most notably the GSIS Stock Purchase Financing Program (SPFP) launched in 1994—coincided with the peak of the PHISIX (now the PSEi). 

The 1997 Asian Financial Crisis inflicted severe losses, exposing the program’s structural flaw: embedding leverage and mark-to-market risk into institutions designed for capital preservation. 

The crisis did not create this fragility; it merely revealed the contradiction. 

XIV. PERA: Risk Transferred, Not Eliminated; When Loss Absorption Becomes a Policy Fault Line 

Current discussions on deepening participation now extend to PERA (Personal Equity and Retirement Account), where savings are managed by accredited administrators and invested in qualified instruments such as mutual funds, UITFs, insurance products, and government securities. 

While PERA removes explicit leverage, it introduces principal–agent problems and asymmetric information risks, with outcomes largely driven by professional managers rather than individual contributors—with fee structures, asset allocation, career advancement and herding behavior playing a decisive role in their decision process. 

Losses being absorbed at the individual level is systemically healthy. But the moment the state attempts to cushion or prevent those losses, it recreates the SPFP problem—only more slowly and diffusely. 

In short, policies framed as "enhancing participation" amplify bubble cycles and effect a tacit redistribution from savers to institutional intermediaries, ultimately eroding—rather than strengthening—the foundations of the capital market. 

XV. Philippine Peso Stress Is the Signal, Not the Noise 

The accelerating GDP slowdown validates our long-held view that the USDPHP breach of the 59 “soft peg” was a signal of mounting structural stress. (Figure 6, middle image) 

It also casts the BSP’s gold sales in a different light—not merely as FX defense, but as an indication of latent stress across government, central bank, and bank balance sheets. 

As we wrote last November: 

The peso’s breach of 59 isn’t just a technical move. It’s the culmination of structural stress that monetary theater can no longer hide.

XVI. Trump’s Weak Dollar Policy: A Temporary Reprieve—Not a Resolution 

The peso’s recent recovery owes less to domestic strength than to global easing dynamics. US dollar weakness—driven by policy stance and market expectations under President Donald Trump—pushed the DXY down roughly 0.8% MoM and 9.8% YoY. 

As a result, USDPHP ended January at 58.86, temporarily slipping below the 59 threshold (+0.85% YoY, +0.12% MoM). 

This reprieve is unlikely to last. Once balance-sheet stress becomes more visible, a test of the 60-level appears increasingly inevitable.

XVII. From Gaming the Index to Gaming the Curve 

At January’s close, the Philippine BVAL yield curve revealed yet another layer of policy response. (Figure 6, lowest chart)

Figure 7

The curve reflects a deliberate, policy-induced bearish steepening. As Q4 GDP slowed to 3%, the BSP eased the front end and belly to support bank funding conditions and preserve financial stability. Simultaneously, 20–25 year yields rose month-on-month, exceeding November 2025 levels, as markets imposed a fiscal and inflation credibility premium amid global term-premium repricing. (Figure 7 topmost image) 

The contradiction is stark: domestic accommodation is deployed to stabilize balance sheets, while long-duration yields signal rising skepticism over fiscal sustainability and inflation containment. 

XVIII. Macro Stability as Policy Objectives of Yield Curve Interventions 

This curve management feeds directly into the gaming of the PSEi 30. 

Historically, widening 10Y–3M and 10Y–6M spreads have coincided with CPI pressure, as accommodation persists and inflation risk migrates through FX and expectations channels. (Figure 7 middle chart) 

Meanwhile, the PSE’s Financial Index has risen across both steepening (2020–22) and flattening (2023) regimes—not because of curve “health,” but because of curve control. (Figure 7, lowest graph) 

Through coordinated yield-curve signaling, peso stabilization, and institutional balance-sheet absorption, authorities project macro stability despite slowing growth—redistributing stress away from markets and toward households, future inflation, and shrinking policy space.

XIX. The PSEi 30 as Collateral Infrastructure 

Beyond boosting expectations and managing optics, the theatrics surrounding the PSEi 30 serve a more practical and underappreciated function: inflating and stabilizing collateral values across the financial system. 

For banks, insurers, trust entities, and large institutions, equity holdings—particularly index-heavy, highly liquid names—are not merely investments. They function as collateral, balance-sheet buffers, and capital-supporting assets used in repo transactions, interbank funding, structured products, and internal risk models. 

In an environment of slowing GDP, rising long-end yields, and latent balance-sheet stress, mark-to-market declines in these assets would immediately tighten financial conditions. Holding the PSEi 30 together—especially its largest constituents—helps preserve collateral valuations precisely when funding pressures are building elsewhere. 

This helps explain why support is selective rather than broad-based. Propping up the largest free-float names delivers the greatest collateral impact per peso deployed, even as market breadth deteriorates. The objective is not market health, but balance-sheet continuity. 

In this light, the PSEi 30 becomes less a reflection of economic confidence and more a policy-adjacent tool—a stabilizing surface that allows banks and institutions to extend accommodation, delay recognition of stress, and avoid procyclical tightening in credit and funding markets. 

But this stability is conditional. Should equity collateral values falter, or when cash flow/liquidity problems intensify, the feedback loop would reverse—forcing deleveraging, tightening credit, and accelerating the very slowdown policymakers are trying to defer.

XX. Conclusion: January’s PSEi 30’s Performance: Not A Vote Of Confidence—But A Managed Outcome 

Index gains were manufactured through concentration, liquidity choreography, curve control, peso management, and the tacit inflation of collateral values. 

What appears as market resilience is, in reality, the financial system preserving its own scaffolding amid deteriorating growth—a classic symptom of a late-cycle phase rather than a genuine expansion. 

In such phases, markets are stabilized not to signal strength, but to delay adjustment. Stress is redistributed away from asset prices and toward households, future inflation, fiscal credibility, and shrinking policy space. 

The longer stability is engineered rather than earned, the more abrupt the eventual repricing becomes—when collateral support weakens and policy capacity is finally exhausted. 

___

Select References (quote and validations) 

Prudent Investor Newsletter, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025 

Prudent Investor Newsletter, The CMEPA Delusion: How Fallacious Arguments Conceal the Risk of Systemic Blowback, Substack, July 27, 2025 

Prudent Investor Newsletter, How Surging Gold Prices Could Impact the Philippine Mining Industry (3rd of 3 Series), Substack, April 02, 2025