Important Insights from the Philippine PSEi 30’s Melt-Up!

 

Investors believe in Keynesianism.  They believe that increased government spending will make us all richer.  This illusion is what is driving this stock market. Bubbles are based on illusions—Dr. Gary North 

In this issue

Important Insights from the Philippine PSEi 30’s Melt-Up!

I. Philippine PSEi 30 Returns Among the World’s Highest

II. Lessons from China’s Previous Easy Money Experiments

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience

IV. Retail Players Emerge

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion

Important Insights from the Philippine PSEi 30’s Melt-Up!

What does the outperformance of the PSEi 30 likely mean?

I. Philippine PSEi 30 Returns Among the World’s Highest

The Philippines' primary equity benchmark, the PSEi 30, stretched its weekly winning streak to five with this week’s 0.53% gain.

This week’s gains pushed its year-to-date returns to 15.8% (as of October 4th).

Figure 1

Accompanied by a massive rally in the Philippine peso, the Philippines' ETF, the EPHE, joins the ranks of global top equity ETFs in terms of US dollar returns (as of October 2nd). (Figure 1, upper window)

Year to date, the PSEi 30 ranked fourth in Asia, after Pakistan, Hong Kong, and Taiwan. (Figure 1, lower image) 

With 16 of the 19 regional benchmarks up by an average of 13.13% in local currency terms, we can generalize that 2024 has been a year of the bulls. Of course, we have two more months to go.

II. Lessons from China’s Previous Easy Money Experiments

Despite recent elevated rates, the current surge in global stocks signifies a product of easy money.

Due to the massive coordinated bailout package unleashed by Chinese authorities to rescue its struggling asset markets (stocks and real estate), Chinese and Hong Kong equities skyrocketed, rising by a stunning 23.4% and 31% over the last four weeks.

However, the returns of China’s equity markets have been capped due to a week-long holiday.

Figure 2

Though many international experts have suddenly become apostates to a perceived return of China’s bull market, I recently pointed out in a tweet that... (Figure 2)

"While previous episodes of government stimulus did bolster valuations, they turned out to be short-lived, highly volatile, and resulted in diminishing returns for #SSE levels. The 2016 & 2020 support had little impact on its bear market. Will history rhyme?"

Or whatever boom that took place before tended to morph into a bust. Even worse, the subsequent stimulus produced diminishing returns with the lower levels of the Shanghai Composite Index (SSE).

In other words, monetary inflation or stimulus from credit expansion must be applied at a much larger scale than before to magnify the effects of a boom. 

As the great Dean of Austrian economics, Murray Rothbard, once warned 

Like the repeated doping of a horse, the boom is kept on its way and ahead of its inevitable comeuppance by repeated and accelerating doses of the stimulant of bank credit. It is only when bank credit expansion must finally stop or sharply slow down, either because the banks are getting shaky or because the public is getting restive at the continuing inflation, that retribution finally catches up with the boom. (Rothbard, 2015)

China’s experience has somewhat resonated with the Philippines.

Figure 3

It took a combination of historic rate cuts, massive reductions in reserve requirements, unprecedented relief measures, and direct injections by the BSP into the banking system via the expansion of its balance sheet to rescue the Philippine PSEi 30 in 2020. (Figure 3, upper image) 

The PSEi 30 peaked in 2022 along with the cresting of the BSP's assets. 

It is also not a coincidence that the PSEi has wilted in the face of the slow-motion erosion of the BSP’s balance sheet, which was eventually reversed in 2023. 

The BSP’s U-turn put a floor under the PSEi 30 and rebooted the current rally. 

One can probably thank Other Financial Institutions (OFCs) for representing part of the National Team supporting the PSEi 30. 

The BSP has been rebuilding its asset base, this time from external borrowings by the National Government and the banking system. 

III. Market Concentration and Unimpressive Volume and Breadth, Rampaging Philippine Bank Shares and the Lehman-Bear Stearns Experience 

Of course, the difference between the bull market of 2009-2013 and today is that the PSEi 30 run has barely been supported by volume and breadth. 

Main board volume remains substantially below the level reached at even lower PSEi 30 levels in 2022. (Figure 3, lower graph) 

Because of this obsession with pumping the index to portray a bull market, the "national team" has concentrated its aggressive stock-pumping activities on the top heavyweights. 

As a result, the market capitalization share of the top five companies reached 51.1% last October 4, following a record 51.92% last April.

Figure 4

Furthermore, because RRR cuts and BSP rate cuts were sold to the public as policies that would accomplish economic nirvana, the Financial/Banking Index roared, with year-to-date returns spiking 37.7% and its index soaring to a record high! (Figure 4, upper chart) 

Astoundingly, shares of China Bank [PSE:CBC] have spiraled in ways echoing Bitcoin, GameStop [NYSE:GME], and Nvidia [Nasdaq:NVDA]! (Figure 4, lower pane)

CBC posted 91.3% year-to-date returns, with much of that accomplished in the last four weeks!

Figure 5

If history tells us anything, bank share prices going berserk could mean anything other than economic or financial prosperity. The experiences of Lehman Brothers and Bear Stearns provide examples: their share prices sprinted to an all-time high before collapsing, heralding the Great Financial Crisis (2007-2008). (Figure 5, topmost chart)

To be clear, we aren’t suggesting that CBC and other record-setting bank shares, such as BPI, are a simulacrum of Lehman; rather, we are pointing to the distortive behavior of speculative derbies that may hide impending problems in the sector. 

Of course, foreign buying did provide support to the national team. For the first time since 2019, the PSE posted net inflows of Php 108 million in the first nine months of 2024. (Figure 5, middle graph)

Meanwhile, in the PSE, the cumulative market share of the PSEi 30’s best-performing ICT and the three PSEi 30 banks has reached 32.73%, which is closing in on August's record of 33.14%.  

IV. Retail Players Emerge 

However, signs indicate that the retail segment appears to be jumping on board the developing mania, which has been marketed as another version of the "return of the bull market." 

Though still negative, 2024’s nine-month breadth has had the best showing since 2017. (Figure 5, lowest image)

Figure 6

Furthermore, the declining share of the top 10 brokers relative to the MBV could be another contributing factor. It was 60.4% in the week of October 4th, down from a recent high of over 65%. (Figure 6 upper visual) 

Major brokers could utilize 'done-through' trades or outsource trades with partner brokers to conceal or dilute this number.

Despite the paucity of volume, the trading share of the top 20 most-traded issues has dropped to about 80% for the fourth consecutive week from the previous range of 84-86%. (Figure 6, lower diagram)

Figure 7

Since the low on June 21st, the returns of the top 10 heavyweights delivered the bulk of the gains for the PSEi 30. While 23 issues closed higher, 2 remained unchanged, and 5 declined. The average return of the top 5 was 26.84%, while the average return for the top 10 was 26.4% (Figure 7, topmost graph) 

Breadth was largely incongruent with this week’s 0.53% returns, 83% of which were attributable to Friday’s pre-closing pump. Although 18 of the composite PSEi 30 issues closed down, the upside volatility allowed for a positive weekly return of 0.21% (Figure 7, middle image) 

V. Why the Opposite Direction of San Miguel’s Share Prices? Conclusion 

Finally, SMC share prices continue to move diametrically opposite to the sizzling hot PSEi 30. (Figure 7, lowest graph) 

What gives? Will SMC’s debt breach the Php 1.5 trillion barrier in Q3?   

Have SMC’s larger shareholders been pricing in developing liquidity concerns? If so, why are bank shares skyrocketing, when some of them are SMC’s biggest creditors? 

Bottom line: The levels reached by the PSEi 30 and its outsized returns attained over a few months barely support general market activities, which remain heavily concentrated on the actions of the national team and volatile foreign fund flows. 

Instead, the present melt-up represents an onrush of speculative fervor driven by the BSP’s stealth liquidity easing measures, even before their rate cut. Moreover, real economic activities hardly support this melt-up.

___

reference 

Murray N. Rothbard, Why the Recurring Economic Crises?, August 27, 2015, Mises.org

 

Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947!

Governments and central banks never perceive risks of excess supply and even less predict a bubble. Why? Because most central planners see debt, oversupply, and bubbles as small collateral damages of a greater good: recover growth at any cost—Daniel Lacalle

In this issue:

Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947!

-The Portentous Year of the PIG (and RAT)

-Year of the PIG as a Harbinger of 2008 Global Recession and the 1997 Asian Financial Crisis!

-The Year of the Pig in the Throes of a 1983 Debt and 1971 Balance of Payment Crisis!

-The Year of the Pig in the Face of the 1959 Economic Slump and as Forerunner to the 1949 FX Crisis

-No, the PIG is NOT at Fault! The Culprit is the Credit or Business Cycle Shaped by Political and Monetary Policies

-Sure, This Time IS Different! Current Conditions Are Ripe for a Year of the PIG-RAT Tantrum, Long the USD Php

Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947!

The Portentous Year of the PIG (and RAT)

With the Phisix up 9.08% in a fiery five-week ramp, with the peso up .7% and with Philippine treasury yields falling (mostly at the longer end), resonating with the behavior of world’s financial markets, just what could go wrong?

For the Year of the PIG, a lot!

Next Tuesday, February 5, will usher in the Chinese New Year. And 2019’s assigned zodiac animal is the Year of the Pig. The Chinese zodiac, according to Wikipedia, represents a classification scheme that assigns an animal and its reputed attributes to each year in a repeating 12-year cycle, an approximation to the 11.85-year orbital period of Jupiter, the largest planet of the Solar System.

Many use the Chinese zodiac not only to establish an individual’s or commercial “social compatibility” also to design living spaces but also to foretell events.

But if history would rhyme, 2019 would be a foreboding year!

Amplified turbulence, dislocation and distress may challenge the Philippine economy, and consequently, the Philippine Stock Exchange in the year of the Pig as it has in its previous experiences.

Figure 1

The Phisix returns in the 12-year cycle of the year of the PIG from 1947: 1959 -39.87%, 1971 -58.97%, 1983 -1.83%, 1995 -6.88% and 2007 +21.43%. Only one in 5 instances (or 20%) has the Phisix registered a positive return in 60 years. (Figure 1, upper window)

How about the January effect’s influence on them? Here are the January returns: 1959 +5.23%, 1971 -9.32%, 1983 +11.95%, 1995 -13.13 and 2007 +8.61%. Only one of the three incidences of positive January (33%) returns managed to close the year with a positive return. That was in 2007. (figure 2, lower window)

The sustainability of the whopping January gains is not guaranteed.

And if history does rhyme, January gains may morph into losses.

Year of the PIG as a Harbinger of 2008 Global Recession and the 1997 Asian Financial Crisis!

But the year of the PIG cannot be seen in isolation. Previous events and events of the year shaped the next year’s activities. That’s how the economy or markets work. These signify a process.

For instance, the mania of 2007 was a precursor to the horrifying -48.24% collapse of the Phisix in 2008, the year of the rat. And that market crash was in reaction to spillover effects of the Great Recession triggered by the US housing and mortgage crisis that culminated with the Lehman bankruptcy.

The Philippines tiptoed towards a recession but was stopped short of it, as the economy, which operated under relatively clean and healthy balance sheets, responded positively to the stabilization programs launched by the National Government (NG) and the Bangko Sentral ng Pilipinas (BSP).  A Php 330 billion (4.1% of GDP) fiscal stimulus was embarked upon by the NG, under the Economic Resiliency Plan (ERP), that was supported by a series of rate cuts by the BSP. 

And 1995 shares a similar backstory.

The magnified volatility of 1995 presaged the mania in 1996 (year of the rat) where the Phisix registered a startling 22.2% return. But exactly 13 months and one day after the end of 1995, the Phisix started its descent, which accelerated into a 68.6% crash over 19 months!

The economic premise behind the crash: the Asian Financial Crisis.

The Phisix peaked a day after the month of January 1997 or in February 3rd at 3,447.6.

So in 2007 and 1995, the same backdrop prevailed: a pre-crisis environment. Year of the pig.

The Year of the Pig in the Throes of a 1983 Debt and 1971 Balance of Payment Crisis!

I will cite from economic history and reports of events that occurred in the year of the Pig in 1983, 1971, 1959 and 1947.

1983 was the year the Philippine Government declared a debt moratorium (debt default)!

From Wikipedia: The country was hit hard by the second global oil crisis of the decade, in 1979. And when the US Federal Reserve raised interest rates in the early 80s, the Philippines’ debt ballooned rapidly, pushing the Philippine economy towards an economic nosedive by 1983 (bold italics added)

From Robert S. Dohner and Ponciano Intal, Jr on a working paper “Debt Crisis and Adjustment in the Philippines” (p.174)

The cautious borrowing policy of the 1970s disappeared in the early 1980s. The most abrupt change was the increasing use of short-term borrowing. This was particularly true of the public sector, which accounted for two-thirds of the increase in short-term debt outside the monetary sector. Much of the increased borrowing was also done through the monetary sector. The Central Bank borrowed heavily between 1980 and 1982, and encouraged banks to do so by providing swap arrangement. Despite its borrowing, Central Bank reserves fell by $2 billion (two-thirds) from the end of 1980 to mid-1983.5 As a result, the monetary sector went from a net external asset position at the end of 1979, to a $2.7 billion net liability position by 1982. By 1982 the share of short-term debt, including monetary sector debt, in total debt rose to 47 percent, a much higher share than in other LDC debtors. The Philippines first considered declaring a moratorium in late 1982. When it finally did so in October 1983, its foreign exchange reserves were nearly exhausted.

The Phisix endured a harrowing 40.84% tailspin in 1984. (the year of the pig-rat!)

How about this Manila Times OP-ED in 2013 “Days of Shame: August 21, 1971 and 1983”?

The author cites the effects of the Plaza Miranda bombing on August 21, 1971, and the assassination of opposition leader Benigno Aquino, Jr. on August 21, 1983, as having influenced 2013’s political conditions.

Aside from economic woes, will a major political event occur this year?

The Philippines suffered a balance of payment crisis in 1970!

Writes James Boyce [The Political Economy of External Indebtedness, Philippine Institute for Developmental Studies]: A balance of payments crisis in 1970 foreshadowed the inevitable turning point at which debt service payments surpass the inflow of new money and the net transfer turns negative. This turning point was temporarily deferred, however, by means of fresh lending, which was unlocked by an IMF adjustment program. External borrowing accelerated greatly in the 1970s, as the country pursued a development strategy of "debt-led growth." For a time, the country - or more accurately, some of its citizens - was able to live "beyond its means," thanks to a positive net transfer of external resources.

So the massive 59% crash of the Phisix was in reaction to a Balance of Payment (BOP) crisis that occurred a year before. The markets and the economy are a process. Year of the Dog-Pig combo!

The Year of the Pig in the Face of the 1959 Economic Slump and as Forerunner to the 1949 FX Crisis

1959’s -39.59% Phisix ghastly meltdown was in response to an economic slump!

Messrs Dohner and Intal from the same NBR paper (p.180): “Philippine trade and industrial performance have been determined by a system of protection initiated in 1950. To deal with external imbalance, the Philippine government began licensing imports, in amounts determined by essentiality of the product. The incentives created for domestic production of these goods led to rapid industrialization and growth during much of the decade, but the growth rate had slowed appreciably by 1959.” (bold added)

In his January 6, 1959 State of the Nation Address (SONA), the eighth president of the Philippines Carlos P. Garcia mentioned the economic difficulties faced by his administration. (bold italics mine, bold original)

Inflationary Pressures.—However, and this is the crux of the matter, at the rate at which these investments in public and private sectors have been undertaken and because of the way they have been financed, which is by expanding credit, it is inevitable that the pressures of inflation have become more pronounced.

In 1958, this was aggravated by the economic recession among our principal trading partners—a factor beyond our control.

The immediate problem today is how to check the inflationary forces that are exerting a heavy pressure on our international reserves. At the same time, we should maintain the momentum of development at an appropriate rate so that the gains we have already achieved will not be dissipated. Thus, the country will forge ahead towards its goal of development. We cannot afford to stop. We must not stop.

Credit expansion, inflation pressures. Rings a bell?

Oh, 1958 was the year of the “earth” pig similar to 2019.

This article provides an astonishing purview of the volatilities endured by the Philippine economy.

From Germolino Bautista An Assessment of the Philippine Economy: “Whether the relationship between G and I in crisis periods is direct or inverse, a common observation during the slump or crisis years 1959-60, 1969-70, 1983-85, 1990-91, 1991-92, and 1997-98 is an increase in the current account deficit and deterioration in the balance of payments position.” Legend G-Government spending, I-private investment. (black added to emphasize on the year of the pig-rat combination)

1947 as a forebear to the 1949 Foreign Crisis

The Philippines was liberated by the Americans on July 4, 1946.

Similar to 1995 and 2007 as an antecedent to crises, two years after 1947 (year of the pig), the Philippines suffered a currency crisis in 1949.

From Facts and Details.com: (bold mine) “At the time of independence in 1946, and in the aftermath of a destructive wartime occupation by Japan, Philippine reliance on the United States was even more apparent. To gain access to reconstruction assistance from the United States, the Philippines agreed to maintain its prewar exchange rate with the United States dollar and not to restrict imports from the United States. For a while the aid inflow from the United States offset the negative balance of trade, but by 1949, the economy had entered a crisis. The Philippine government responded by instituting import and foreign-exchange controls that lasted until the early 1960s. 

More from a paper from the Arellano Law University [An Analysis of the History of Philippine Trade Policy* (1950-2004) CHRISTIAN LALUNA, ARNIL PARAS and VANESSA SOLIVA]  (bold mine)

The first big shock that would alter postwar Philippine trade (and economic) policy was a result of the foreign exchange crisis of 1949. The import-substitution policies adopted by the state were not in fact intended as a long-term development framework; rather, it was to conserve scarce foreign currency assets in the Central Bank

No, the PIG is NOT at Fault! The Culprit is the Credit or Business Cycle Shaped by Political and Monetary Policies

To recap on the 12-year cycle of the year of the pig:

1947-1949: Precursor to the Foreign Exchange crisis

1958-1960: Economic Slump (1959- year of the pig)

1969-1971: Balance of Payment crisis

1983-1985: Debt Moratorium/ Economic recession

1995-1997: Antecedent to Asian Financial Crisis

2007-2009: Forerunner to the Great Recession

Since the Philippine independence from the US, economic turmoil has shockingly encumbered the year of the pig. Its relations per year differ though.  The year of the pig heralded the crises of 1949, 1997 and 2008. The emergence of a crisis (1983) or its culmination (1971) has also shrouded the year of the pig.

The year of the PIG hasn’t been responsible for such gamut of economic dislocations. Or it hasn’t been superstitions that have plagued the Philippine financial and economic sphere since 1946.

These episodes shared some common denominators: credit expansion. Its ramifications were price inflation, economic slump, recession or a financial crisis or a combination thereof.

Some had external influences. Domestic origins were responsible for the others. 

That being the case, the appropriate prism for these would be an 11-13 year credit/business cycle.

Yes, spare the pig.

Sure, This Time IS Different! Current Conditions Are Ripe for a Year of the PIG-RAT Tantrum, Long the USD Php

Will 2019 escape the dark clouds of the Year of the Pig-Rat or 11-13 year credit cycle? Will this time be different?

I have to admit. In one sense, this time is different!

Figure 2

When it comes to the fiscal deficit, this time has truly been momentous. (figure 2, upper window)

The publication of the December and the 2018 data on the NG’s fiscal balance have oddly been delayed. Nevertheless, the public spending to GDP ratio, which I estimate at 20%, should be at a landmark high too.

Through the engineered transition to a command economy, government diversion of resources has reached unmatched levels.

This time is different!

Prior to this administration, the financing of government spending has been channeled indirectly through credit creation from the banking system.

The BSP took policy rates to unprecedented lows to fire up bank lending. Though it recently raised rates by 175 bps, policy rates remain at unparalleled lows. (figure 2, middle window) From 1985 to 2018, the average interest rate, according to the trading economics, was 7.89%. That’s 314 bps points afar.

This time is different!

The law of diminishing returns has eroded the limited efficacy of this mechanism, so the BSP used its nuclear option, debt monetization in 2015.

Since fiscal stimulus has transformed into the principal economic development tool under this administration, the BSP’s monetization of public spending has also broken to uncharted levels. (see figure 2, lowest window)

This time is different!

Figure 3

And aside from BSP monetization, the NG has revved up on borrowings from the capital markets. At the end of 2018, NG borrowing PLUS bank lending comprised 90% of the NGDP! (figure 3, upper window)

This time is different!

NG borrowed Php 335.6 billion from the capital markets in 2018. The BSP extended financing to the NG in the amount of Php 268.2 billion in 2018. The total was Php 603 billion.

Here is what I wrote last January:

However, if spending in December 2018 would be on the same level with 2017 at Php 330.24 billion, and if the revenue target of Php 222.525 billion would be achieved, then December 2018’s deficit would reach Php 107.715 billion for a year-end total of a whopping Php 584.932 billion! That’s Php 61.322 billion or 11.7% more than the target! That’s 3.5% of the 9-month annualized real GDP!

See Why Deficit-to-GDP May Reach 3.5% in 2018; November BIR and BoC Revenues Plunge on the Economic and Credit Weakness; Public and Bank Debt Hit Php 15.06 Trillion! January 13, 2019

Why raise Php 603 billion? Has the Php 584 billion deficit been reached or even breached?

The BIR has admitted that it has been short from reaching its 2018 targets.

Though the Department of Budget and Management admits that the deficit cap target has been surpassed, low figures have been cited to understate the actual deficit.

Could this be the reason why the delay in the publication of the NG report? Will the NG tamper with it? And will the Bureau of Treasury and the DBM transfer the excess of the December deficit to 2019 budget?

If budget insertions have become chic, should accounting acrobatics on the NG fiscal conditions not be possible?

And as NG debt and bank credit race to new highs, Philippine treasury yields have spurted higher. (see figure 3, lower window)

Yes, yields have come down to late-2018 levels, but they remain elevated compared to 2017.

Figure 4

Prior to the Asian Crisis, the 2-10 year spread shrunk by 106 bps in 1996 from 250 bps in 1995. The current spread at 21.6 bps has been lower than 1995-1996! (figure 4, top and middle window)

This time is different!

And this could be the first time (perhaps in decades) that the yield curve has been totally flat, if not partly inverted! (figure 4, lowest window)

This time is different!

Figure 5

And of course, in backing the banking system’s epochal credit expansion, which sent the industry’s balance sheet growth to unequaled levels, the BSP matched such a feat on their balance sheet! (figure 5, upper and middle windows)

This time is different!

Of course, to recite the Financial Stability Coordinating Council’s latest Financial Stability Report (FSR), [bold mine]

While there is no definitive evidence of a looming crisis, it is also clear that shocks that have caused dislocations of crisis proportions have come as a surprise. What is not debatable is that repricing, refinancing and repayment risks (3Rs) are escalated versus last year and this could result in systemic risk if not properly addressed in a timely manner.

This Time is different!

Tying them all up, the first cockroach emerges…

From the Inquirer (January 11) “Five of the country’s largest banks are rushing to cover a combined loan exposure of $412 million, most of it lent without the benefit of collateral protection, after the local shipbuilding unit of Korean conglomerate Hanjin declared bankruptcy earlier this week—the biggest corporate default in Philippine history.”

See? This time is different!

Of course, not every asset at risk in the year of the Pig. The USD Php has been the principal beneficiary of the tantrums in the year of the PIG (and the RAT)! (see figure 5 lower window)

The current "This time is different" climate has exactly been the conditions fertile for the Year of the PIG-RAT tantrums!

Long the USD-Php!