Will the Interim Return of the Low-Interest Rate Regime Fire Up the Philippine PSE’s Property Index?

The main problem with the accumulation of debt at low rates is that it has the same effect as a real estate bubble. It disguises real liquidity and solvency risk, because borrowing costs are too good to be true. And they are not true—Daniel Lacalle 

 

In this short issue 

Will the Interim Return of the Low-Interest Rate Regime Fire Up the Philippine PSE’s Property Index? 

I. As Financial Conditions Substantially Eased, Global Markets Celebrate with a Melt-Up! 

II. In November, the PSEi 30 Surfed the Global Equity Boom Despite Hurdled with Low Liquidity  

III. The PSEi 30’s Changing Market Leadership: From Finance to the Property Sector? 

IV. Divergent Performance Among Developer Member Firms of the Property Index 

V. Since 2019, Changes in BSP Rates Immaterial to the Property Index Slump 

 

Will the Interim Return of the Low-Interest Rate Regime Fire Up the Philippine PSE’s Property Index? 

 

The Property Index has been a primary beneficiary of the recent bounce in the PSE brought about by expectations of financial easing.  Is this sustainable? 

I. As Financial Conditions Substantially Eased, Global Markets Celebrate with a Melt-Up! 

 

Inflationary biases unleashed! 

 

Massive short squeezes, unwinding of hedge positions, and yield-chasing trend-following crowds have sent a flurry of bids across global asset classes.  

 

Markets have interpreted global central banks—led by the US Federal Reserve—as signaling a dovish stance—which means forthcoming rate cuts!   

 

Moreover, the snowballing trend of global central bank easing has reinforced this sentiment.  

 

Under the spell of a "soft landing," the entranced global markets boomed as "Goldilocks economy meets the Santa Claus rally!" Amazing. 

 

Figure 1 

 

US financial conditions swung to an unprecedented easing last November as the US dollar sunk. (Figure 1, top two charts) 

Global bonds rallied most since the Great Financial Crisis! (Figure 1, second to the lowest graphs) 

 

Emerging Market funds reported their first inflows in four months.  (Figure 1, lowest diagram) 

 

US stocks nearing record highs! Bitcoin reached its highest level since May 2022! Gold prices soared to an all-time high! 

 

Risks have been thrown under the bus.   

 

What could go wrong? 

 

II. In November, the PSEi 30 Surfed the Global Equity Boom Despite Hurdled with Low Liquidity  

Figure 2 

 

Aside from the gigantic rally in Philippine Treasuries, the PSEi 30 reported its 3rd best November month-on-month showing in the last eight years.  (Figure 2, upper table) 

 

November's gains whittled down the YTD and YoY losses to 5.22% and 8.22%, respectively.  

 

Unfortunately, such advance emerged amidst a stunning drop in main board volume, which reached 2010 levels! (Figure 2, lower graph)  

 

Remarkably, cross-trades have padded up the thinning volume.  For instance, the December 2023 session opened with SPNEC special block sales, which accounted for 37% of the main board volume of Php 4.1 billion.  Alternatively, the total mainboard volume would have been only Php 2.6 billion without the SPNEC trade.  

 

Furthermore, the growing concentration of trading activities on heavyweights and the largest market cap issues expose the inherent build-up of risks. 

 

III. The PSEi 30’s Changing Market Leadership: From Finance to the Property Sector?

Figure 3 

 

Expectations of the BSP cuts have fueled a likely change in the complexion of the market leadership.   Rising rates have led to the outperformance of financials that have recently cushioned the PSEi 30 from a substantial decline.  (Figure 3, upper window) 

 

However, easing financial conditions has strengthened the performance of the two-PSEi 30 property firms.  The public has been impressed by the idea that low rates would reinvigorate the property bubble. 

 

The free float market pie of the two property members of the PSEi 30 has started to gain ground against the three banks and the PSEi 30 composite. (Figure 3, lower chart) 

 

IV. Divergent Performance Among Developer Member Firms of the Property Index 

Figure 4 

However, in the context of property developer members of the PSE Property Index, except for Double Dragon [PSE: DD], the focal point of most of the weekly rally has been on the two PSEi 30 issues: SM Prime [PSE: SMPH] and Ayala Land [PSE: ALI].  The rest of the developer members of the index showed modest monthly gains (Megaworld PSE: MEG & Robinsons Land PSE: RLC) while Filinvest Land [PSE: FLI] has lagged horribly in all categories. (Figure/Table 4 upper chart) 

 

Using the pretext of low rates, index managers have attempted to shift the market's attention towards the embattled property sector—the reason the PSEi 30 remained afloat at the 6,250 level.   

 

Yet, their price charts reveal the disparate paths. (Of course, past performance does not guarantee future results) (Figure 4, lower graph) 

 

Divergent and concentration activities among members of the property index have signified a consequence of the low-volume market. 

 

Let us see if the pumps would draw or attract foreign money. 

 

V. Since 2019, Changes in BSP Rates Immaterial to the Property Index Slump 

Figure 5 

 

Of course, the most critical question is:  Will low rates benefit the Property Index? 

 

If recent history should rhyme, the answer is negative.  

 

Since 2019, the bear market of the property index and its diminishing returns occurred despite historically low rates and the massive liquidity injections by the BSP. (Figure 5, top and middle windows) 

 

It only worsened during the latest inflation spike and the BSP rate hikes.  

 

Its falling share of the total PSE volume highlights the ordeal of the property index, which means the sector's liquidity drought has not been confined to the financial conditions but has diffused into their stocks. (Figure 5, lowest chart)  

 

We recently delved or wrote an exposition of this.  

 

Or, recent changes in BSP rates have had little influence on the financial and market entropy experienced by the sector.   

 

If my humble guess is correct, any interim boom may represent a dead cat's bounce, a bear market rally, or a bull trap. After all, no trend moves in a straight line.  

 

Sure, one can trade the momentum.   

 

But caveat emptor.  

Why the BSP will be Slashing its Policy Interest Rates Soon

 

Every inflation must eventually be ended by government or it must "self‑destruct"—but not until after it has done untold harm—Henry Hazlitt 

 

In this short issue 

Why the BSP will be Slashing its Policy Interest Rates Soon 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

III. BSP’s Asymmetric Monetary Policies 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Why the BSP will be Slashing its Policy Interest Rates Soon 

 

The recent crash in the yields of the Philippine treasury curve has strongly signaled the BSP’s coming rate cuts.  

 

I. Led by T-Bills, Yields of Treasury Curve Crashed: "Bullish Steepener" 

 

Will the streak of BSP rate cuts start this December or early 2024?  Why? Because these have been communicated to the public by the local treasury market.  

  

Figure 1 

 

The reliable but unheralded treasury traders—via demonstrated preference (action speaks louder than words)—have been on a Treasury panic buying spree that sent yields collapsing across the curve. (Figure 1, upper window) 

  

Treasury traders appear to be expecting a (possibly a "surprise") sharp decline in inflation. If so, a disinflationary environment entails a weaker private sector economic performance this Q4.  

  

Since its peak last November 16th, the recent tailspin of the 1-month T-bill yield hallmarked the performance of various Treasury maturities across the curve.  

 

Yet, the scale of the decline (1- and 3-month T-bills) has been substantially deeper compared to the Q2 2019 episode when the BSP began its credit easing campaign. (Figure 1, lower graph)   

 

And this may be pressing enough to force the BSP to act. 

 

Figure 2 

 

Furthermore, since yields of short-term or T-bills have plunged the most, this reshaped the slope into a "Bullish Steepener"—frequently pointing to rate cuts. 

 

Treasury curve abruptly steepened from a relatively "flat" slope last September and October. (Figure 2, upper chart) 

 

II. BVAL Treasure Rates Below the BSP’s Policy Rates; The Erosion of Inflation Tax 

 

What’s more, the across-the-curve plunge in treasury yields has resulted in a sharp tightening—BSP overnight interbank rates have become HIGHER than treasuries! (Figure 2, lower graph)  

 

Figure 3 

 

On top of this, BSP rates have been higher than the CPI and the headline GDP, reinforcing this financial "tightening" phase on an economy heavily dependent on leverage and liquidity. 

 

Crucially, higher BSP rates than the CPI—theoretically—translate to positive "real" rates, which implies that this has eroded the government's seignorage fee or the inflation tax.  

 

The BSP embarked on rate cuts when "real" rates turned positive in Q2 2019.    (Figure 3, upper graph) 

 

III. BSP’s Asymmetric Monetary Policies 

 

But, of course, monetary authorities have recently engaged in asymmetric policies.   

  

Sure enough, it has raised headline rates to multi-decade highs, which reduced credit transaction growth mainly to the supply side.  

  

But its interest rate cap on credit cards or subsidies to consumer credit has also resulted in a textbook response of fueling excess demand for consumer credit.  (Figure 3, lower chart)   

  

Such extensive build-up of leverage in the consumer's balance sheets has driven the indulgent demand for vehicles, luxury-related spending activities, and magnified property speculations. 

  

The other ramification is the transformation of bank lending operations towards consumers at the expense of industry. 

 

Other behind-the-scene operations have marked the BSP's liquidity operations.  

  

Banks and non-bank financials have been directly financing the National Government’s deficit spending via Net claims on the Central Government (NCoCG) or indirect QE—injecting liquidity into the government and the financial system.  

  

These off-kilter operations afforded the BSP to raise headline rates and paint an impression of a "sound" macro-environment. 

 

IV. BSP’s Possible Rationalizations: Expected US Fed Rate Cuts and Escalating Streak of Global Central Bank Easing 

Figure 4 

 

Aside from inflation, the BSP could rationalize its actions with the widely expected rate cuts by the US Federal Reserve in early 2024 and use the appeal to the majority—the growing streak of rate cuts by global central banks. (Figure 4, upper chart) 

 

 

Figure 5 

 

Previously, changes in the BSP policy rates have coincided with the gyrations in the yield differentials of the Philippines and the US (proxied by the 10-year).   BSP rate cuts in 2019 narrowed the spread between the 10-year Philippines and the US. (Figure 4, lower diagram) 

 

Today, since the US Fed has adopted a more hawkish stance than the dithering BSP, this broke the previous correlations—the rate spread has compressed even as the BSP held on its rates at multi-decade highs.  

 

Put this way, domestic developments determine the BSP policies.  

  

Of course, since current developments in the treasury markets have anchored our anticipation of the possible changes in the BSP's policy stance, this is also conditional on the sustainment of this unfolding trend. 

 

V. BSP’s Zero Bound Policies and the PSEi 30’s Diminishing Returns 

 

Finally, the establishment experts have been whetting the speculative impulses of the disenchanted public starved of easy money gains with the prospects of a stock market boom from "rate cuts."    

 

True, "rate cuts" have had ephemeral amplifying effects on the YoY returns from 2009-2018, but this relationship broke in 2019 (pre-pandemic).  (Figure 5, top chart) 

 

But "rate cuts" had to be bolstered with the BSP's historic Php 2 trillion liquidity injections to spur a momentary rally in 2H 2020 to 1H 2021. 

  

Worst, the BSP’s zero bound (ZIRP) policies have been associated with the PSEi 30’s diminishing monthly long-term returns. 

  

It is no coincidence that the rate cuts have fueled spikes in the CPI and contributed to the attenuation of the Philippine peso, which are all interrelated with the PSEi 30’s return. (Figure 5, lower graph) 

  

Artificial speculative booms from free-lunch monetary policies only induce capital consumption and a lower standard of living.