The PSEi 30 6,500 Enigma: A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

 The house of delusions is cheap to build but drafty to live in, and ready at any instant to fall—A. E. Housman

The PSEi 30 6,500 Enigma:  A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

Along with the rise in global risk appetite, the Philippine PSEi reached 6,500 but its market internals told a different tale. 

The prospect of easy money has whetted the speculative appetite of the global financial markets.

With the US dollar index down by 0.92% this week, it spurred a rally in the currencies and stock markets of the Asia-Pacific region.

Figure 1

Five of the nine ex-Japan Asian currencies rose, led by the Thai baht (THB), Indonesian rupiah (IDR), and the Singapore dollar (SGD). The Philippine peso  (PHP) increased by 0.14%. The heightened speculative fervor was apparent in the region's stock markets. (Figure 1, upper window)

Seventeen of the 19 national bourses in the Asia-Pacific region jumped by an average of 1.43%. China's SSEC and Sri Lanka's Colombo were the only laggards. (Figure 1, lower chart)

Meanwhile, five of the national bourses set fresh all-time highs for the week: Japan, India, Taiwan, Mongolia, and Pakistan.

Simultaneously, the Philippine PSEi 30 marked a second straight weekly gain. 

However, there is an idiosyncratic story behind the PSEi 30’s surge.

Figure 2

This week's advance brought the PSEi 30 back into positive territory year-to-date (+0.66%). 

But gainers were in the minority, with 14 of the 30 members closing higher. Four of the five biggest market cap issues were the focal point of this week's advance. (Figure 2, topmost pane)

Ironically, the average weekly return was only 0.12%, indicating that on an equal-weighted basis, the overall performance was subdued due to balanced upside and downside returns from its members. 

Market breadth in the PSE was slightly negative, with decliners leading advancers for the second consecutive week. (Figure 2, second to the highest image)

Though mainboard volume fell by 23.1% to Php 3.69 billion, the top 10 brokers still controlled a significant majority, averaging 57% of it. (Figure 2, second to the lowest diagram) 

Further, the top 20 traded issues represented 86.1% of the mainboard transactions. (Figure 2, lowest chart) 

All this illustrates the skewed nature of trading activities where institutional players have been propping up the headline index. 

Figure 3

This week’s pump led by ICTSI (+2.92%) has elevated its free float market cap to its highest level. (Figure 3, topmost chart) 

Pumps in BDO (+8.3%) and SM (+2.35%) have also boosted the top 5's free float cap to 50.5%.  BDO ranked third after SM and ICT in terms of free float market cap. 

The share of the top 5’s free float market cap jumped to 50.5%. 

Incidentally, end-session pumps and dumps were comparatively insignificant compared to previous weeks.

Figure 4

In any case, however one slice or dice it, the slack in volume remains the principal factor behind the nearly decade-long drought in returns.

June's gross volume reached a low not seen since 2010, while the first semester's gross volume plummeted to 2011 levels. (Figure 4, topmost and middle charts) 

It is no coincidence that the declining PSE volume has coincided with the banking system's liquidity metric: cash-to-deposit ratio. (Figure 4, lowest graph)

Despite all the constant yelling by the mainstream of statistical hypes, which have been labeled as G-R-O-W-T-H, the PSEi 30 remains one of the region's laggards, which are likely symptoms of capital and savings consumption.

And notwithstanding the perpetual cheerleading, the echo chamber has still been silent about the mounting risks from debt, leveraging, inflation, and various forms of misallocations and malinvestments. They’ve been reticent about the mounting risks of war too! 

Aside from the distortion from the BSP's policies, institutional pumping remains a significant factor behind this bear market. 

Or, the result of such organized pumps is to magnify pricing imbalance by inflating their share prices relative to their natural income streams and distorting capital prices, resulting in the amplification of the misallocation of resources in the real economy.

Figure 5

In the end, besides political objectives (e.g. rising stocks = resilient economy = good governance), another reason could be to prevent the PSEi 30 from sliding into a death cross, potentially prompting further and deeper scale of foreign selling (as in the past). Figure 5

It's worth noting that despite the obvious shift to a wartime economy, which comes at the expense of the market economy, authorities and the mainstream prefers the general public to remain complacent, assuming that everything will remain hunky dory or stable. 

In doing so, authorities can continue accessing public savings to fund their militant political projects (boondoggle) and exercise centralized control over the economy, with institutional cronies acting as their facilitators.  

Bubbles eventually burst. 

2023 PSE Stock Market Accounts Hit a Record 1.9 million as Active Accounts Fall to All-Time Lows, BSP Chief on Foreign Money "I Do Not Know Why They Do Not Like Us"

 

Statistical analysis without establishing the meaning of a particular economic activity cannot tell us what is going on in the world of human beings. All the statistical analysis can do is to describe things; it cannot explain, however, why people are doing what they are doing. Without the knowledge that human actions are purposeful, it is not possible to make sense out of historical data—Dr Frank Shostak 

In this issue

2023 PSE Stock Market Accounts Hit a Record 1.9 million as Active Accounts Fall to All-Time Lows, BSP Chief on Foreign Money "I Do Not Know Why They Do Not Like Us"

I. PSE’s Stock Market Accounts Hit a Record 1.9 million

II. Differentiating Growth Rate from a Growth Trend, The Digitalization of the Philippine Stock Market 

III. It is the Active Accounts that Matter: Reaching an All-Time Low!

IV. PSEi 30’s Bear Market: Reduced Participation Rate, and Diminishing Volume; Age Distribution of Participants Suggests a Worrisome Trend!

V. Stock Market Doldrums Brought About by Savings Drought Manifested in Banking Data and Market Manipulation

VI. 2024 5-Month Volume and Market Breadth Exhibits Oversold Conditions

VII. Symptoms of Market Distortions and Inefficiencies: An Examination of Market Dominance by the Top 10 Brokers and PSEi 30's Top 5 Issues

VIII. BSP Chief Remolona on Foreign Money: "I Do Not Know Why They Do Not Like Us"

2023 PSE Stock Market Accounts Hit a Record 1.9 million as Active Accounts Fall to All-Time Lows, BSP Chief on Foreign Money "I Do Not Know Why They Do Not Like Us" 

The PSE registered an 11.3% growth in stock market accounts in 2023, but active accounts fell to an all-time low, supported by a dearth in volume. The BSP Chief questions why foreign money continues to elude the Philippines, highlighting the challenge facing local investors. 

I. PSE’s Stock Market Accounts Hit a Record 1.9 million 

Inquirer.net, May 29, 2024: Stock market accounts rose 11.3 percent to 1.906 million in 2023  from 1.7 million in the previous year, according to the Philippine Stock Exchange’s (PSE) annual Stock Market Investor Profile report. The growth was mainly due to new accounts opened through the GStocksPH platform, which also pushed the share of online accounts to 80 percent of total stock market accounts. Online accounts stood at 1,525,768 as of end-2023, up 21.2 percent or 266,861 accounts.

Figure 1

The headlines provide the good news: a surge in new stock market accounts. This surge was highlighted by PSE's infographics, which emphasized "growth." (Figure 1, topmost table) 

We'll take it further.

In the context of peso nominal gains, the 193,285 increase in 2023 marked the largest after 2021 and 2018. (Figure 1, middle chart)

The upsurge in new accounts has increased the stock market's penetration level to a record 1.7% of the population (using GDP calculations). (Figure 1, lowest graph)

Or, this represents an unprecedented 2.44% of the population over 15 years old and 3.7% of the labor force (PSA labor survey).

However, there's a catch. If so, why has the PSE's volume been falling?

II. Differentiating Growth Rate from a Growth Trend, The Digitalization of the Philippine Stock Market

Let's dig deeper to understand the underlying factors.

The reason is that new accounts are only one part of the equation.

Figure 2 

First, the headlines only reveal the growth rate, but they don't reveal the growth trend. The fact is that since peaking in 2018, the growth trend has been on a decline. (Figure 2, topmost chart) 

2023 could be seen as a countercyclical bounce, possibly driven by a shift to a mobile application trading platform similar to the US Robinhood Markets. 

As evidence of the marked transition towards a digital economy, the share of online trading hit an unmatched 80% of the total. This growth was accompanied by a 21.2% YoY increase. (Figure 2, middle image)

In contrast, traditional brick-and-mortar accounts saw a significant decline in 2023. This decline was marked by a contraction of -16.2% YoY and a share drop from 26.5% to 19.95%. (Figure 2, lowest graph)

This shift towards online trading is reflective of the industry's broader trend towards digitalization, which has been driving the growth of new accounts.

As we explore this trend further, we will delve into its implications for the sell-side industry's future.

III. It is the Active Accounts that Matter: Reaching an All-Time Low!

Returning to the paradox of the record new accounts amidst declining volume, a more pertinent metric is "active accounts."

Figure 3

Consider this: while the total number of active accounts represents 17.6%, online accounts make up 19.3%. This means that in total, there are only 335,459 active accounts—a historic low! (Figure 3, topmost table and middle window)

Interestingly, the retail segment experienced a lesser decline compared to institutional accounts. Retail active accounts dropped from 20.1% to 17.6% of the total, while institutional accounts plummeted from 23.7% to 20.5%.  (Figure 3, lowest graph)

In nominal figures, retail accounts decreased by 2.2%, while institutional accounts saw a significant dive of 22.53% 

The PSE numbers didn’t specify whether the new accounts were included in this year’s active accounts or if the active accounts represented last year’s total numbers.

However, if it's the former case, then nearly 58% of the new accounts are part of the active ones! If this holds true, will they, like their predecessors, fade soon?

IV. PSEi 30’s Bear Market: Reduced Participation Rate, and Diminishing Volume; Age Distribution of Participants Suggests a Worrisome Trend!

Figure 4

Like day follows night, the declining participation rate has characterized the PSEi 30’s bear market in disguise. 

Since its climax in 2017, the PSEi 30's (end of year) downtrend has resonated with the corrosion of the growth of total accounts. 2023’s 11.3% marked the second-lowest YoY growth rate since 2017.  Notably, this growth rate was achieved from a very low base. (Figure 4, topmost chart) 

The decline in participation rates can also be attributed to the poor returns from investing in the PSE, as many investors became "long only," and wary of taking risks after experiencing prolonged losses. (Figure 4, middle pane) 

Moreover, diminishing volume has accompanied the PSEi’s 30 bear market. (Figure 4, lowest diagram)

Figure 5

Interestingly, among age groups, while millennials suffered the most decline in participation, followed by Gen X, it was the seniors who provided the most growth in total accounts. Senior accounts soared from 10.8% to 14.8%!  (Figure 5, topmost table)

That online accounts dominated the total was also manifested in the age distribution. The boomers, who in the past years (except 2021) have shied away from online accounts, became the largest growth sector, surging from 5% to 10.9%. (Figure 5, second to the highest table)

On the other hand, millennials, who composed the bulk of the age grouping, endured a substantial contraction, from 55.7% to 49%! Part of Gen Z helped in the increase from 20.8% to 21.5%.

This reveals a lot about income and savings conditions. It likely exposes that the 30-44 age grouping must have endured most from the decaying conditions in real income and savings, hence their participation pullback in the PSE.

It also manifests that under the current high inflation environment, the age group with the most savings, the seniors or boomers, were driven to scour for yields in the stock market. They braved the challenges of learning to use digital platforms for trading to gamble.

The thing is, a savings drought, which brought about the PSEi 30’s bear market, has been manifested by the decaying gross volume or turnover, which reverberated with the decrease in the participation rate. 

Needless to say, a restoration of savings should anchor a comeback of a healthy bull market—similar to the pre-2013 era. Without it, everything else represents a juvenile belief in unicorns, the tooth fairy, or castles in the sky or false optimism and unsustainable trends.

V. Stock Market Doldrums Brought About by Savings Drought Manifested in Banking Data and Market Manipulation

Symptoms of the deterioration of savings have similarly been manifested in the banking system. The 10-year decay of the bank’s deposit liabilities or cash-to-deposit ratio reveals a lot about inflation and malinvestments via asset bubbles ravaging savings. (Figure 5, second to the lowest and lowest charts)

Figure 6

The Warren Buffett Indicator—market cap divided by the GDP—also exhibits this deviation. The PSEi 30’s declining ratio demonstrates the bear market in motion. (Figure 6, topmost graph) 

Additionally, since debt has anchored private and public activities, it bloats the GDP. Therefore, the overstated GDP performance inflates this market cap-to-GDP ratio.   Furthermore, the rising Consumer Price Index (CPI) has coincided with the decline of the ratio, indicating that inflation has been a major hindrance (a menace) to the financial economy. 

That’s not all.

Massive "marking the close" pumps and dumps have contributed to the intensifying mispricing of the local stock market. Basic economics tell us that price controls lead to either shortages or gluts. The same holds true for the stock market. 

Friday’s massive 1% "mark the close" pump came about from the top 10 brokers who were responsible for 80% of the transactions. End session pumps and dumps have become a common feature in the PSEi 30. (Figure 6, second to the highest charts)

The essence of the stock market is its pricing mechanism in the titles to capital. 

The gaming of the index, thereby, percolates or radiates to the economy via misallocations of capital brought about by these pricing distortions. It exacerbates malinvestments from monetary policies and other forms of interventions—which of course, would be revealed over time. 

At the very least, all these contribute to the erosion of savings. 

VI. 2024 5-Month Volume and Market Breadth Exhibits Oversold Conditions 

Many have come to the conclusion that the PSE’s turnover has been improving. 

That may be partially true. While May’s volume jumped 25.6% YoY—helped by the Month-end marking the close pump—following April’s 71.12% surge, the 5-month aggregate turnover declined 6.2% from last year. (Figure 6, second to the lowest image) 

The two-month surge has barely offset the declines of the early months. 

Sure, market breadth has exhibited signs of improvement. The 2024 5-month advance-decline spread marks the lowest since 2019. (Figure 6, lowest diagram)

In a nutshell, despite the PSE’s cheerleading via the headline numbers, the depressed turnover, and low participation rates backed by improving partial market internals exhibit oversold conditions. 

VII. Symptoms of Market Distortions and Inefficiencies: An Examination of Market Dominance by the Top 10 Brokers and PSEi 30's Top 5 Issues"

Still, the current environment has been a product of loose financial conditions, which means more pressure on the PSE should conditions tighten. 

However, the ever-dithering BSP would likely tolerate or gamble with "higher for longer" inflation than tighten monetary conditions due to unsustainable debt conditions. 

Furthermore, the sluggish turnover also implies increasing stress on the sell-side (brokerage) industry. According to the PSE, there are 122 trading participants, 37 of which have online platforms. 

But here's the rub: the top 10 brokers capture a vast majority of daily transactions. Most of them represent institutional brokers—possibly accounts of banks and other financial institutions.

Figure 7

Last week, the average soared to 63.4%, mainly due to Friday’s mark-the-close pump, where the top 10 brokers accounted for a staggering 80% of the Php 22 billion trade! (Figure 7, topmost visual) 

The limited distribution of transactions to a select number of brokers highlights the extent of concentration of activities or "market dominance" in the stock market, which is equally reflected in the dispersion of weightings in the PSEI 30’s free-float market capitalization. 

The aggregate free-float cap of the top 5 issues hit a record 51.92% last April 19th! (Figure 7, second to the highest image) 

These phenomena are all manifestations of distortions: market inefficiencies, imbalances and irregularities. 

As an aside, financial services accounted for 15% share of the retail accounts in 2023. This suggests that a substantial share of direct retail transactions involves those who sell "financial services" (buy and sell side), potentially leading to many principal-agent problems. 

By inference, our guess is that many traditional retail brokers are on the threshold of survival. 

Ironically, the PSE brags about the headline numbers of stock market accounts, while there appear to be ZERO takers of its short-selling program since its inception. 

Also, since the start of its Volume Weighted Average Price (VWAP) trading program last March 1, total transactions amounted to only Php 415.435 million. 

These new programs have had little or no impact on the sell-side industry. 

Yet, the BSP and PSE’s policies will continue to haunt savers while applying pressure to the sell-side industry. 

In my humble opinion, the PSE aims to consolidate the brokerage industry by reducing the number of brokers (or competition) and favoring a few larger players—to increase its control. 

VIII. BSP Chief Remolona on Foreign Money: "I Do Not Know Why They Do Not Like Us" 

In a surprising twist, the BSP chief expressed concerns about the lack of depth in the PSE, citing the limited foreign participation as a key factor contributing to its lack of international recognition. (bold mine) 

And finally, we have our missing portfolio flows. We used to fear portfolio flows because we saw them as hot money. They come in and leave at the first sign of trouble.

But these days, they are not so scary. In the first place, they are so negligible these days; they can come in and out, and it will not matter. 

But the big thing is the game has changed; the intent is not into active investment anymore; it is in passive investment. Passive means you buy the index. At least at the core of your portfolio, you need an index. Maybe you can play around on the sides of your portfolio, but the core has to be an index. 

Huge trillions of dollars are now flowing into the major equity indices, global equity indices, and the major primary bond indices. I think we are in a few indices. We talked to Vanguard, and they said we are about 0.1 percent of their bond index. 

But we are not in any major equity indices, BlackRock or State Street. We do not know why; people say it is our withholding taxes, but we are not sure what is going on. 

Bakit hindi tayo kasali? The smaller markets are in these indices. Colombia is in that index. Etsepuwera tayo, hindi tayo kasali. I do not know why they do not like us.​ (Remolina, 2024) 

This lack of understanding (incredible cluelessness) and the tendency to blame foreign investors for the country's financial issues is striking. 

Yet, as an old Wall Street Maxim goes, "Money goes where it is treated best." 

The Philippine authorities and private regulators should reflect or self-examine on whether they have been creating an attractive environment for investors or if they have been providing money with a red-carpet treatment or not.  The Philippine Stock Exchange is a monopoly with self-regulatory powers. 

The questions to ask: has the BSP’s inflation targeting regime, a "trickle-down policy, " successfully diffused to build up savings for the average Pedro and Maria? 

Or has it supported the debt-financed Keynesian "build and they will come" policy framework benefiting the elites and the government while consuming the savings of the general populace through the economic maladjustments as evidenced by the record savings-investment gapsavings-investment gap? 

In essence, have their policies been supportive of local savers and conducive to the industry? 

The crux: If they can’t draw local savers into the capital markets (bonds and stocks), why would foreigners follow? 

Foreign portfolio flows into the Philippines have declined significantly since 2013. (Figure 7, second to the lowest graph) 

The Philippine bond market is one of the smallest in Asia, which is likely why foreign flows have been limited. (Figure 7, lowest chart) 

Then why blame foreigners for "not liking" the Philippines?

____

References

Dr Frank Shostak, Can Data by Itself Inform Us about the Real World? May 27, 2024, Mises.org

Philippine Stock Exchange, STOCK MARKET INVESTOR PROFILE 2023, May 2024, PSE.com.ph

Eli M Remolona: The challenges we face at Bangko Sentral ng Pilipinas, Speech by Mr Eli M Remolona, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the central bank of the Philippines), at the General Membership Meeting of the Financial Executives Institute of the Philippines, Makati City, 6 March 2024. April 16, 2024, Bank for the International Settlements

 

 

Why PSE’s Share of Active Stock Market Accounts Dropped to 20% in 2022, The Role of Savings in the Stock Market

 

Here then is a crucial point: you cannot plan markets. By their very nature, you can only set people free so that they can interact and exchange, and thereby develop markets themselves. Similarly, several of the socialist countries, seeing the importance of the capital markets in the West, have been trying to develop stock exchanges, but with little success. First, again, because stock markets cannot be planned, and, second, because, as we will see further, you cannot have markets in titles to capital if there are still virtually no private owners of capital in existence—Murray N. Rothbard 

 

In this issue 

 

Why PSE’s Share of Active Stock Market Accounts Dropped to 20% in 2022, The Role of Savings in the Stock Market 

I. As Part of the Capital Market, the Role of the Stock Market is Economic 

II. How Stock Market Deficits Compound on the PSE’s Liquidity Predicament 

III. While the Growth of New Stock Market Accounts Slowed, the Share of Active Accounts Plummeted! 

IV. Demographic Distribution: Most Affected Groups were (Generally) Gen-Z Group and Seniors  

V. Declining Bank Liquidity, Falling PSE Volume and the PSEi 30’s Bear Market; What to Expect 

 

Why PSE’s Share of Active Stock Market Accounts Dropped to 20% in 2022, The Role of Savings in the Stock Market 

 

Philippine PSE 2022 Investor’s Profile: The growth rate of new accounts fell while the share of active accounts dived. Why? Scant savings caused the decline in PSE volume and equity losses.  

 

I. As Part of the Capital Market, the Role of the Stock Market is Economic 

 

PSE, June 5, 2023: The number of online stock market accounts rose by 8.6 percent in 2022 to 1,258,907 accounts. Despite the muted growth in online accounts compared to previous years, the average value per online transaction rose by 33.2 percent to Php 46,236.40 from Php 34,701.80 in 2021. While close to 100,000 online accounts were added last year, its non-online counterpart recorded a decrease of 7,156 accounts to 453,827. Given this, the total stock market accounts registered in 2022 was at 1,712,734, up by 5.7 percent from 2021’s 1,620,017 accounts. “The growth in accounts may have been subdued in 2022 but I expect an uptick in numbers again with the foray of new stock brokerage firms in the online trading space and the upcoming rollout of stock investing features in finance apps,” said PSE President and CEO Ramon S. Monzon. 

 

In 2022, the PSEi 30 returned -7.8%, anchored on a plunge in peso volume (19.9% gross and 20.8% main board). 

 

Remember that equity transactions are always funded.   

 

On this note, the depressed volume reflects a shortfall in domestic savings or disposable income and credit flows (from local savers, foreign savers, & money from loans unbacked by savings or "fiduciary media"). 

  

Fundamentally, capital markets serve as an intermediary to channel savings into investments.  The capital market primarily consists of stocks (stock-related instruments such as ETFs, REITs, and more) and fixed-income securities (debentures, commercial and Treasury bonds).   

 

While a crucial aspect is financing, its obverse side is entrepreneurial resource allocation.  

 

So, we depart from the incumbent BSP chief's perspective of the capital market.   

 

What does that mean? What it means is that, over time, if you wait long enough, the market cap will probably be growing faster than the economy. What that says is that, over time, initially, economies are driven by big personalities and families. Of course, it is only appropriate that we are talking about the Ayalas or the San Miguels. 

 

But, over time, as the economy tries to grow and get more and more financing from everyone, we need capital markets. Of course, banks usually grow ahead of capital markets but, hopefully, soon to follow are other ways of raising capital-the biggest two of which are the bond market and the stock exchange. (Medalla, 2023) 

 

Banks outgrow the capital markets fundamentally because of existing policies biased against a market-based distribution system and the implicit "trickle-down" policies embraced by authorities. 

Figure 1 

 

Proof? 

 

Banks have almost monopolized the financial industry; the aggregate bank share of the total financial resources has been close to its highest level at 82.5% as of April 2023, which raises concentration risks. (Figure 1: topmost pane)  

 

And this is supposed to represent a "sound" financial system? 

 

And capital markets seem neither about adrenalin boosters nor feeding the government. 

 

In a way, the stock market is like your pulse rate. You get excited, it goes up. You hear Professor Medalla, it goes down because he lulls you to sleep. 

 

But what matters is the long-run average. You need people to watch the economy 24/7. You need people who watch companies 24/7. 

 

By the way, this means great value for the government itself. Because as companies make accounting [disclosures] to their stakeholders, the BIR [Bureau of Internal Revenue] gets a lot of data. [So,] it gets harder and harder to have multiple books. As the government, in turn, gets more money, it can have more money for financing infrastructure and social development. (bold added) 

 

Au contraire, instead of helping savers distribute capital to its best and most efficient or productive commercial use through price discovery, feeding the government, which translates to consumption than production and competition with the markets for resources, fosters economic imbalances. 

 

Of course, the government uses the bond markets to raise Treasury funds from savers. Thanks to the capital markets, the Philippines' public debt hit a milestone of Php 13.9 trillion last April 2023.  

And easier access to the public's savings could be one reason behind the botched attempt by the state-owned Landbank to acquire (nationalize) the PDS from the PSE.  

Based on ADB data, the Philippines has the second smallest bond market in the region after Vietnam. 

 

The imperatives of the capital markets are savings and capital formation, as explained by economist Fritz Machlup: 

 

A process of capital formation is set in motion only if the income which is not consumed is used for production.  It does not matter whether the saver is himself the entrepreneur or whether he places his purchasing power or money capital at the disposal of another entrepreneur. The process of transferring savings to the producers may be performed through the borrowing and lending facilities of the savings banks, but mainly through the capital market which centres around the securities market. Which one of these organizations for transferring savings will be used will depend in each case on judgments as to risk and liquidity (the possibility of withdrawal or realization by selling) and prospects as to yields. If the savings are put into savings bank deposits, the yield will be equivalent to the interest payment. If they are used to purchase fixed interest-bearing securities (mortgage loans, bonds, debentures) the yield will take the form of interest and capital appreciation. If they are used to purchase shares, the yield will consist of dividends and capital appreciation. The relative attractiveness of savings deposits, the bond market and the stock market, changes with the different phases of the trade cycle. (Machlup, 1940) 

 

With this in mind, it comes as no surprise why organized and managed pumps and dumps (mostly during the pre-closing phase) have become a defining characteristic of the PSE. (Figure 1, middle window, chart from technicstock.net) 

 

When the prevailing perception is that capital markets should perform political objectives, it is bound to become inefficient, which forfeits their implied benefits.  And present conditions only elaborate such decadence. 

 

II. How Stock Market Deficits Compound on the PSE’s Liquidity Predicament 

 

Declining savings has not only been evident in the economy but have also surfaced in the PSE through diminishing volumes or market liquidity.  Philippine gross savings rates have been on a structural downtrend. (Figure 1, lowest chart) 

 

And deflating asset prices becomes a self-reinforcing dynamic as many participants become "HODL" (hold on for dear life) while enduring reduced paper wealth.   

 

Further, via the wealth effect, personal or corporate balance sheet deficits may lead to diminished consumption.   

 

For a debt-dependent economy, cascading asset prices lower collateral values magnifying collateral calls or margin calls, which amplifies the risks of liquidations.   

In turn, such pressures could also prompt a pullback in financing production, which could cause dislocations in the supply chain and lower production.  

 

Easy money "stimulus" will be of little help when the pool of wealth ("real" savings) declines.  Although it buys time, it only aggravates the underlying conditions. 

 

Finally, asset losses are not the only consideration; inflation rubs salt in the balance sheet wound. 

 

III. While the Growth of New Stock Market Accounts Slowed, the Share of Active Accounts Plummeted! 

 

Symptoms of these forces are evident in the degeneration of participation or penetration rates at the Philippine Stock Exchange.   

Figure 2 

 

Yes, nominal stock market accounts continue to grow, but since peaking in 2018, its growth rate has fallen.  It grew by 5.72% in 2022, down from 16% in 2021.  Total PSE accounts of 1.713 million represented about 1.5% of the 115.5 million population in 2022.  (PSE, 2023) (Figure 2, highest graph) 

 

Yet, more people have indirect exposure to the stock markets via mutual funds, UITFs, and ETFs than direct ones.   Although here, we will be discussing the direct trading accounts via the network of PSE brokers.  

 

The net gain of 92,717 accounts in 2022 was the smallest since 2017's 95,623. (Figure 2, second to the highest pane) 

 

The corroding returns of the PSEi appear to have resonated with the public's participation.  While the record PSEi high in early 2017 motivated the influx of the biggest crowd in 2018, the succeeding grinding bear market has reverberated with dwindling participation rates. (Figure 2, second to the lowest and lowest charts) 

Figure 3 

 

The online platform continues to draw retail participation, though. It was up by 8.62% in 2022—strikingly, a plunge from the double-digit growth rates from 2014-2021, which averaged 32.05%!  

Nonetheless, with traditional or brick-and-mortar accounts suffering a 1.6% contraction in 2022, the online platform snared the majority (73.5%) of PSE investors. (Figure 3, topmost, second to the highest left and right charts) 

 

The thing is, the deterioration has not only been on the slower entry of new players but on the share of active accounts, which fell to 20.2%, the lowest since at least 2012!  In short, the PSE may have 1.7 million accounts, but only 345k were active. (Figure 3, second to the lowest graph) 

 

Market internals data as daily trade, advance decline spread, and the number of issues traded daily confirm this. 

 

Aside, including new entries, the sharp drop in active participants has been consistent with the entropy in volume/liquidity. (Figure 3, lowest window) 

 

IV. Demographic Distribution: Most Affected Groups were (Generally) Gen-Z Group and Seniors

Figure 4 

 

Also, the demographic distribution reveals a sharp decrease on the fringes of the PSE.  Or, the penetration level declined significantly in the youngest and the eldest groups.  This dynamic applies to both online and traditional accounts but includes inactive participants.   

 

Seniors regressed to their pre-2021 levels but were slightly lower in total.  In the context of the online platform, seniors also reverted to pre-2021 levels after the deviant spike in 2021. (Figure 4) 

 

But the generally Gen Z group (18-29), the most vulnerable—reported a dive in account participation below the 2018-2021 levels. 

 

The proposition could be that savings from jobs and income may have been difficult for the Gen Z category to enroll in the stock market. 

 

The bulk of the investors/traders was in 30-60 years of age. 

 

V. Declining Bank Liquidity, Falling PSE Volume, and the PSEi 30’s Bear Market; What to Expect 

Figure 5 

 

Finally, bank liquidity conditions resonate with the peso turnover at the PSE, as shown by cash to deposits and deposit liabilities. (Figure 5, top and second to the highest windows) 

 

Since peaking in 2013, their declines have mirrored the ebbing flow of the PSE's gross volume, which includes special block sales. (Figure 5, second to the lowest graph) 

 

To reiterate, ultimately, savings from capital formation will determine the fate of local equity markets.   And this will be expressed by the peso volume/turnover, where price levels and participation rates should follow.  After all, nothing draws a crowd more than winners.  

 

What to expect? 

 

With an exceedingly low base, the public's participation could grow (under present conditions), but perhaps to reflect population growth. 

 

That said, a "foray of new stock brokerage firms in the online trading space and the upcoming rollout of stock investing features in finance apps" will hardly generate meteoric growth.  

Like the real estate industry, such forecasts reveal the bedrock of mainstream expectations via the distortion of Say's Law "Build and they will come." 

 

That the top 10 brokers have shanghaied no less than 50% of the daily mainboard volume in the face of declining stock market liquidity should make life more difficult for the industry. And institutional brokers comprise most of the daily top 10. (Figure 5, lowest chart) 

 

According to the PSE, 125 brokers are active, and about 32 have online trading platforms.  A back-of-the-envelope calculation means that 115 brokers (mostly retail-traditional models) compete intensely for the morsels.   

 

But again, since savings are the roots, improvement in capital formation will be the foundation for increased returns and penetration levels.  

 

And since there is little attempt to reform the "capital markets" to make these more market-oriented, present policies only entrench the extant imbalances. 

 

Further, with the public programmed to believe that an easy money regime represents the path to utopia, its redistributive effects only lead to boom-bust cycles, which consume capital/savings. 

 

Again, the principal beneficiaries of the politicized capital markets are the elites, who comprise the Forbes 50 wealthiest. 

 

And though the stock market is not a casino, present policies have made it into one.  And sadly, small retail investors pay for it with the depletion of their savings. Ergo, the shrinking direct active participation in the PSE. 

 

Remember, pricing integrity is one of the prerequisites of healthy capital markets.  And the present market structure seems to discount this goal. 

Until then, the current decremental conditions should prevail.   

 

As contrarian investor Doug Casey has adroitly observed, "Trends in motion tend to stay in motion."  

 

____ 

References 

 

Felipe M Medalla: Beyond just a bellwether - the capital markets as catalyst for dynamic and inclusive economic growth, Speech at the inauguration of the Philippine Stock Exchange's new events hall, Manila, 28 May 2023, Bank of International Settlements, June 1, 2023.  

 

Machlup, Fritz The Stock Market Credit and Capital Formation, William Hodge and Company, 1940 Mises.org p.27  

 

Philippine Stock Exchange 2022 PSE Stock Market Investor Profile, PSE.com.ph May 2023