Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

What's been lost in this frenzied competition for eyeballs and "likes" is the distinction between opinion and journalism. The post-truth cliche is that there is no distinction, that everything is mere opinion and spin, but this is not true: journalism is different from opinion and spin—Charles Hugh Smith 

In this issue

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?"

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30?

VI. The Unannounced "Historic Moments" 

Unveiling the Reality Behind the Philippine PSEi 30’s 7,000: Market Concentration, Divergence, Manipulations, and the Overton Window 

I. The PSEi 30 Closes Above 7,000: Is This a "Historic Moment?" 

Along with the region's sanguine performance, the Philippine PSEi 30 broke past 7,000. Could this signify the start of a bull market, as the media and consensus have suggested?

Figure 1

Businessworld, September 13: The PSEi achieved a significant milestone, closing above 7,000 for the first time in over 19 months. Strong foreign buying and expectations of a US Federal Reserve rate cut contributed to this historic moment. (Figure 1, upper picture) 

Historic. Moment. 

Sure, the PSEi 30 has traded above 7,000 for the last five days and closed above this threshold in the last two. However, how is reaching a 19-month high equivalent to a "historic moment?" 

Media is said to reflect the prevailing mood or express the public’s level of confidence. That’s according to the practitioners of ‘Socionomics.’ 

Could this headline be indicative of the market’s mood? 

Let’s examine public sentiment by analyzing the market internals. 

II. Foreign Inflows Targeted at Biggest Market Cap Issues, Historically Chasing Tops 

Foreign buying was certainly a factor. 

This week, aggregate net foreign inflows amounted to Php 2.7 billion, marking the fifth consecutive week of net buying and the second-largest inflow during this period. (Figure 1, lower diagram) 

However, foreign inflows accounted for only 41.44% of the average weekly turnover, the lowest in five weeks. 

This suggests that local investors have begun to dominate the transactions on the Philippine Stock Exchange (PSE). 

Additionally, the scale of weekly foreign investment was far from record-breaking.

As a side note, in today’s digitally connected, "globalization-financialization" world, foreign inflows could also include funds from offshore subsidiaries or affiliates of local firms.

Figure 2

Sure, expectations of the US Federal Reserve's interest rate cuts have not only fueled a strong rebound in ASEAN currencies but have also energized speculative melt-up dynamics in the region's equity markets, driven by foreign players. 

ASEAN currencies outperformed the global market from July 10 (following the US CPI release) through September 11. (Figure 2, topmost table) 

Yahoo Finance/Bloomberg, September 12: Southeast Asian equities have cemented their position as a favorite play of money managers positioning for the Federal Reserve’s policy pivot. Four of the five best-performing Asian equity benchmarks this month are from the region, with Thailand leading the pack. The buying frenzy has put foreign inflows on track for a fifth consecutive week while the MSCI Asean Index is now trading near its highest level since April 2022. [bold added] (Figure 2, lowest chart) 

Moreover, the yield-chasing phenomenon has spilled over into the worst-performing equities, or the laggards of the region. 

Yahoo Finance/Bloomberg, September 12: After being sidelined by investors for much of this year, some smaller equity markets are suddenly winning favor. The trend is particularly evident in Asia, where Thailand, Singapore and New Zealand rank as the top performers in September. Their benchmarks have risen at least 3% each so far, even as MSCI Inc.’s gauge of global stocks has fallen about 1% following a four-month winning streak. Investor focus seems to be shifting as the world’s biggest equity markets such as the US, Japan and India take a breather, and China’s slump deepens. For many of the smaller Asian markets, a limited exposure to the artificial intelligence theme means their valuations aren’t expensive, making them attractive just as the Federal Reserve’s dovish pivot helps boost their currencies and allows some central banks to embark on rate cuts. [bold added] 

The "core to the periphery" phase indicates that investors have been pursuing yields in less developed and less liquid markets, which are inherently more volatile and considered higher risk. This shift could signify a late-cycle transition. 

So yes, while there may be a semblance of increased confidence due to foreign participation, this dynamic appears to be limited to the most liquid and largest market capitalization issues—those capable of absorbing significant trading volumes.

And that’s exactly the case. Except for last week’s drop to 81%, the percentage share of the 20 most traded issues relative to the main board volume has risen in tandem with the PSEi 30 since mid-June. (Figure 2, lowest image)

That is to say, the PSEi 30’s performance was largely driven by concentrated trading volume in a select group of elite stocks.

Figure 3

Using the BSP’s portfolio flow data, July’s portfolio flows represented the largest since April 2022. (Figure 3, topmost image)

However, the larger point is that foreign money flows tend to chase the peaks of the PSEi 30.

In fact, foreign investments often surged during the culminating (exhaustion) phase of the PSEi 30’s upward momentum, a pattern observed since 2013.

Will this time be different?

It’s important to note that the BSP’s portfolio flows include foreign transactions in the fixed-income markets, but the size of these flows is relatively insignificant.

In a nutshell, the purported confidence brought about by foreign participation has been largely limited to the PSEi 30. 

III. PSEi 30 7,000: Primarily an ICTSI Show; Diverging PSEi 30 and Market Breadth

Does media sentiment resonate with the PSE’s market breadth?

In a word, hardly.

The PSEi 30 rose by 1.25%, marking its second consecutive weekly advance and its ninth increase in 12 weeks since this upside cycle began in the week ending June 28th.

This week’s rebound pushed its year-to-date returns to 8.88%.

While we have seen some substantial returns due to heightened volatility in some of the PSEi 30's underperformers, such as Converge (+10.5%), Aboitiz (+8.4%), and Bloomberry (+8.3%), it was the performance of the two largest market capitalization stocks, SM (+3.47%) and ICT (+2.75%), that drove this week’s free-float gains. (Figure 3, middle pane)

The PSEi 30’s average return was 1.03%. The difference between this figure and the index reflects distortions caused by free-float weighting.

Yet, the increasing volatility in the share prices of several PSEi 30 and non-PSEi 30 firms suggests the formation of miniature bubbles.

With a 17-13 score, decliners outnumbered gainers in the PSEi 30, indicating a divergence between market breadth and the headline index.

Despite reaching the “historic moment” of the PSEi at 7,000, market breadth continues to weaken. (Figure 3 lowest chart)

Declining issues have outpaced advancing issues for the second consecutive week, with the 69-point margin nearly double last week’s 37. Declining issues led the market in all five trading sessions.

Figure 4

Yet, the market capitalization weighting of the top five issues rose from last week’s 51.15% to 51.34%, primarily due to ICT’s increase from 10.83% to 10.99%. (Figure 4, topmost chart)

Or, 5 issues command over half the PSEi 30 price level!

This week’s pumping of the PSEi 30 pushed ICT’s share price to a record high of Php 418.6 on Thursday, September 12th. (Figure 4, middle graphs)

To put it another way, ICTSI has shouldered most of the burden in pushing the PSEi 30 to 7,000.

Additionally, ICTSI's rise has been supported by rotational bids of the largest banks, SM, SMPH, and ALI (the six largest), which is publicly shaped by media and the establishment narratives through the promotion of BSP and US FED easing as beneficial to stocks and the economy.

The public has been largely unaware of the buildup of risks associated with pumping the PSEi 30, driven by a significant concentration in trading activities and market internals

The market breadth exhibits that since only a few or a select number of issues have benefited from this liquidity-driven shindig, the invested public has likely been confused by the dismal returns of their portfolios and the cheerleading of media and the establishment.

IV. PSEi 30 Rose to 7,000 on Depressed and Concentrated Volume 

Does the market’s volume corroborate the media’s exaltation of the PSEi reaching 7,000?

Succinctly, no.

To be sure, main board volume surged by 22%, increasing from an average of Php 4.9 billion to this week’s Php 5.9 billion. (Figure 4, lowest image)

However, main board volume remains substantially lower than the levels observed when the PSEi 30 previously reached the 7,000-mark.

Figure 5

Moreover, despite a 4.2% monthly surge in August that pushed year-to-date returns (January to August) to 6.94%, the eight-month gross volume fell to its lowest level since at least 2012. (Figure 5, topmost visual)

That’s in addition to the disproportionate share weight of over 80% carried by the top 20 issues on the main board volume, as noted above.

Incredible, right?

But there’s more. 

The main board volume consists of:

-Client-order transactions

-Dealer trades (usually day trades)

-Cross-trades (trades from clients in the same broker)

-Done-through (intrabroker/broker subcontract) trades 

Last week, the top 10 brokers controlled 53.84% of the main board volume, averaging 56.75% since the end of June.

Or, concentration in trading activities has also been reflected in the concentration of broker trades.

The point is, what you see isn’t always what you get.

Main board (and gross) volume doesn’t necessarily reflect broader public participation.

The sharp decline in direct participation by the public in 2023 underscores this reality. The PSE’s active accounts comprised only 17.6% of the 1.9 million total accounts in 2023—the lowest ever. (Figure 5, middle image)

Instead, trades within the financial industry have played a significant role in the PSE’s overall turnover.

For instance, in Q1 2024, the BSP noted that claims of Other Financial Corporation (OFC) on the other sectors "grew as its investments in equity shares issued by other nonfinancial corporations," and also “claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares”

Have OFCs been a part of the national team? OFCs include bank subsidiaries, public and private insurance and pension firms, investment houses, et.al. (BSP, 2014)

Why would the PSE’s volume endure a sustained decline if there has been significant savings to support the alleged increase in public confidence?

Historic? Hyperbole. 

V. Why Ignore the Impact of the Flagrant Manipulations of the PSEi 30? 

Finally, why would everyone discount, dismiss, or ignore the brazen "pumps-and-dumps" and "pre-closing price level fixing" at the PSE?

In the last five days, managing the index level involved early ICTSI-fueled pumps, aided by frenetic rotational bids on the other top five to six market caps. (Figure 5, lowest images)

After surpassing 7,000-level intraday, the local version of the "national team" dumped their holdings—using the 5-minute pre-closing float—onto unwitting foreign and retail buyers.

Despite this, the PSEi 30 managed to close above the 7,000 level during the last two days—albeit on low volume, with negative market breadth and concentrated trading activities.

Still, does everyone believe that the mounting distortions in the prices of (titles to) capital goods will come without consequences for the financial markets and the real economy?

What happened to the army of analysts and economists? Has the fundamental law of economics escaped them?

Or does the management of the PSEi 30 levels represent part of the establishment’s manipulation of the Overton Window?

Sure, the mainstream media has been so desperate to see a "bull market" that they describe a 19-month high as a "historic moment."

However, much of today’s media reporting seems to be more than mere cheerleading: genuine journalism has been sacrificed in favor of copywriting for vested interests paraded as news. 

VI. The Unannounced "Historic Moments" 

But the so-called "Historic Moment" has manifested in many unpopular and unannounced forms.

Let us enumerate the most critical ones: 

First, systemic leverage, consisting of PUBLIC DEBT plus TOTAL bank lending, has reached Php 28.515 trillion as of July 2024, accounting for 113% of the estimated 2024 NGDP!  Public debt servicing has also reached unparalleled levels!

Second, Q2 public spending, the financial industry’s net claims on the central government (NCoCG), and the banking system’s held-to-maturity (HTM) assets have also reached all-time highs.

Third, the banking sector’s business model transformation—from production loans to consumer loans—has been unprecedented.

Fourth, the savings-investment gap has reached a significant milestone.

Fifth, PSE borrowings, led by San Miguel’s Php 1.484 trillion, have also reached historic highs.

Sixth, the money supply (M1, M2, and M3) relative to GDP remains close to its record highs in Q1 2021.

Figure 6

Seventh, the BSP’s asset base remains near the record high attained during the pandemic bailout period (as of June 2024.) (Figure 6 topmost chart)

While there are more factors to consider, have you heard any media or establishment mentions or analyses of these issues?

Don’t these factors have an impact on the "fundamentals" of the PSE or the economy?

Or are we expected to operate under a state of "blissful oblivion," or the blind belief that "this time is different?" (The four most-deadliest words in investing—John Templeton)

It not only fundamentals, the current phase of the market cycle also tells a different story than the consensus whose primary focus is on a "return to normal" phase. (Figure 6 middle and lowest graphs)

Good luck to those who believe that the PSEi 30’s 7,000 level signifies a bull market or a historic moment.

____

References

The OFCs sub-sector includes the private and public insurance companies, other financial institutions that are either affiliates or subsidiaries of the banks that are supervised by the BSP (i.e., investment houses, financing companies, credit card companies, securities dealer/broker and trust institutions), pawnshops, government financial institutions and the rest of private other financial institutions (not regulated by the BSP) that are supervised by the Securities and Exchange Commission (SEC).

Jean Christine A. Armas, Other Financial Corporations Survey (OFCS): Framework, Policy Implications and Preliminary Groundwork, BSP Economic Newsletter, July-August 2014, bsp.gov.ph

 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

Bulls of 1929 like their 1990s counterparts had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings—Dr. Kurt Richebächer 

In this issue 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade 

Has BBM’s SONA Cycle Peaked? While the headline index has shown resilience in July, market internals reveal structural weaknesses. The unraveling of the Yen-Yuan carry-trade increases global contagion risks. 

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

The following post is a follow-up on my July 21st, “The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects” 

Since its interim peak on July 19th, the PSEi 30 has dropped 2.97%—as of the week ending August 2nd—supported by this week’s decrease of 1.79%, marking its second consecutive decline. 

The major Philippine benchmark fell in 5 of the last 9 trading days. 

Interestingly, this week’s larger decrease came as the Philippine government is expected to announce the Q2 GDP—which has been widely projected to outperform—and June’s labor force survey. 

The authorities are also set to release July's CPI print, which the BSP expects to show a bounce from last month.

And it's also earnings season, where the consensus expects Q2 earnings to exceed expectations. 

Meanwhile, the establishment and media have been peddling the idea of the “ghost” month affecting the stock market’s performance, earnings, and the economy. 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

First, let's examine the performance of the Philippine Stock Exchange last July*. 

*Nota Bene:

-The base reference matters. In my perspective, the 2013 starting point represents the real peak of the PSEi 30 based on volume and market internals.

*Annual returns of the PSEi 30 partially represent an apples-to-oranges comparison due to marginal changes in its membership.

*The data indicated reflects nominal returns and not CPI-adjusted or real returns.

Figure 1

Thanks to the pre-SONA pump, the PSEi 30 jumped 3.23%—representing its second-best monthly performance in 2024 and the biggest July returns since 2018. (Figure 1, topmost image)

It was also the largest of the BBM's pre-SONA pumps over the last three years.

On a year-to-date basis, the PSEi 30's meager 2.62% returns signified its best showing since 2019, which highlights the ongoing bear market.  (Figure 1, middle graph)

Despite this, diminishing returns continue to be a scourge on the PSEi 30.

But how about the volume?

Though July's gross turnover was up 11.3% from a year ago, in peso terms, its depressed level, which was almost equal to 2021, reinforced the downtrend since 2015. (Figure 1, lowest chart)

Figure 2 

Gross volume includes the published special block sales and the undeclared substantial share of cross-trades.

In the first 7 months of 2024, gross volume fell by 8.4% year-over-year (YoY) to Php 865.5 billion, marking a third consecutive annual decline. (Figure 2, highest window)

This means that the paltry improvement last July has not been significant enough to cover this year's volume deficit.

The 7-month main board volume likewise dropped 3.69% to Php 702.7 billion, which signified levels below 2018. (Figure 2, middle visual)

Resonating with the gross volume levels in peso, it has been a downhill for the main board volume since peaking likely in 2013.

Amazing.

The more than a decade-long depression in the PSE's gross and main board volume represents the decadent conditions of capital or savings.

It must be emphasized that these volumes have been inflated by foreign trade, pumps by the "national team," and intra-day dealer trades.

In the first 7 months of 2024, the share of foreign participation has risen from 45.44% in 2023 to 48.8% this year. (Figure 2, lowest diagram)

Foreign investors remained marginal sellers, posting Php 27 billion in outflows, their fifth consecutive year of net selling.

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

As for the "national team," the Other Financial Corporations (OFC) could be part of this cabal engaged by authorities to prop up the index.

Clue?

The BSP on the OFC’s activities in Q1 2024: The BSP on the OFC’s activities in Q1 2024: “The QoQ growth in the other financial corporations’ domestic claims was attributable to the increase in its claims on the other sectors, the central government, and the depository corporations. The other financial corporations’ claims on the other sectors grew as its investments in equity shares issued by other nonfinancial corporations and loans extended to households increased. Likewise, the sector’s claims on the central government rose as its holdings of government-issued debt securities expanded. Moreover, the sector’s claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares. (bold added) [BSP 2024]

Figure 3

The growth of OFC’s claims on the private sector slipped from 9.5% in Q4 2023 to 8.5% in Q1 2024, which was also reflected in the claims on depository institutions, whose growth rate decreased from 20% to 13.9%. 

Nevertheless, both claims surged to record highs in nominal peso levels, reflecting the returns of the PSEi 30 amounting to 7% and the Financial Index to 17% in Q1 2024. (Figure 3, upper and middle charts) 

OFCs have not just been funding the government; they have also been propping up the PSE! 

To emphasize, the percentage share of the free float capitalization of the top three banks reached an unprecedented 22.7% of the PSEi 30 last May! (Figure 3, lowest image) 

Though it has slipped, it has remained within a stone's throw of 21.85% as of the week of August 2nd. 

The same banking heavyweights command a whopping 89% of the overall Financial Index pie, which is stunningly higher than the 79% share in the week of July 16, 2023.  

This outgrowth partially reflects the decrease in the number of members from 9 to 7, due to the exclusion of Rizal Commercial Bank and Union Bank. 

The only non-bank member of the index is the Philippine Stock Exchange [PSE:PSE].

Figure 4

The Financial Index has not only starkly outperformed, alongside ICT, electrifying the gains of the PSEi 30, but it has also been absorbing a greater share of the depressed volume of the PSE. (Figure 4, topmost graph)

That is, the uptrend in the Financial Index has climbed along with its estimated volume share of the PSEi 30, comprising 18.15% last June. (Figure 4, middle image)

As such, the concentration of gains in the index has also resonated in the context of gross volume.

To wit, the rising concentration risk comes amidst a declining trend in profit growth of the banking system, where a bulk of it represents accounting profits. For instance, mark-to-market losses are concealed via record Held-to-Maturity (HTM) assets, and BSP relief measures that understate NPLs, etc.

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy

And it is not just banks.

While year-to-date (YTD) gains of the PSEi 30 members have been evenly distributed (as of August 2), the returns of the top five issues have defined the index's performance rather than the overall breadth. (Figure 4, lowest pane)

For instance, the traded volume of the top 20 most active issues increased by 40% this July compared to a year ago and was up by 2.17% YTD 2024 from the previous year.

In the same vein, the volume of the Sy Group soared 46.6% last July from the same month in 2023 and was up 7.3% YTD 2024 compared to a year ago. 

This indicates that the heavy index pumping last July by the Philippine version of the “National Team” amplified the percentage share of the top 20 issues and the Sy Group in the context of volume. 

Meanwhile, the average share of the top 10 brokers increased from 56.98% in July 2023 to 57.6% last month. 

Aside from the sluggish volume, the PSEi 30’s SONA gains have barely been reflected in the PSE’s constellation. 

The advance-decline spread last July 2024 was -150 compared to -166 in the same month a year ago. Again, the PSEi was up 3.23%.

Figure 5

This divergence reverberated in the YTD performance: although negative breadth has become less negative—or price declines have been less intense—a positive sign, they are still declining.  Again, the PSEi was up 2.62% YTD. (Figure 5, topmost diagram) 

Lethargic volume (a symptom of capital consumption), rising risks from the concentration of activities in trading volume (reflecting maladjustment in balance sheet exposure), select stock prices (inflation of mini-price bubbles), broker exposure (increased balance sheet leveraging?), as well as low levels of retail trades (low savings), and rising dependence on foreign trade (increasing reliance on global capital flows) translate to magnified risks of significant downside volatility or simply—a meltdown. 

A stock market meltdown leads to a decrease in collateral values that underpin bank lending, which magnifies balance sheet mismatches, increases illiquidity, and heightens the risk of insolvency within the industry and among its borrowers. It also weakens the balance sheets of investment, pension, and insurance funds (such as the government’s SSS and GSIS), potentially leading to increased capital deficits and further heightening the risk of illiquidity and insolvencies. 

The BSP would likely bail some of these out at the expense of the peso. 

During the stock market meltdown in March 2020, the Finance Chief called on the SSS and GSIS to boost or "rescue" the stock market. The BSP followed this up with record cuts in official rates, historic liquidity injections, and the implementation of various relief measures. The rest is history. 

The BSP implemented ex-Fed chairman Ben Bernanke advise, 

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse (Bernanke, 2009) 

The Philippine version of the national team likely exists for these reasons. 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

Incredibly, the establishment and media continue to entertain and mislead the public with the alleged influence of the so-called "Ghost Month" on stocks or the economy.

Because "Ghost Month" is a superstition rooted in Chinese tradition (religion), the media and establishment's embrace of it assumes that the markets and the economy are driven by Chinese culture, even when the Philippines is predominantly a Catholic population. (Figure 5 middle window)

For example, some BSP literatures cite the "Ghost Month" to rationalize the unexplainable. The BSP should address accusations of their having 'ghost employees' instead. 

The repetitive references to the so-called "Ghost Month" also assume that foreign participation in the financial markets and the economy is influenced by Chinese tradition.

Or, are investors or market participants in the PSE and the economy predominantly of Chinese descent or a practitioner of Chinese traditions?

Some PSE facts regarding the alleged misfortunes of the Ghost Month:

Since the PSEi uptrend from 2003 through 2023, August has closed lower in 14 of the 21 years, or 67% of the time, with an average change of -0.72%. Yet, August 2021 delivered a majestic 9.33% return, the highest since 2000. August 2022 also produced a 4.24% return, the highest since 2008. (Figure 5, lowest graph)

So, what happened to the "Ghosts" of 2021 and 2022? Did the PSEi call upon the movie comedians known as the "Ghostbusters" to foil the rut? Or, have these rallies been a product of the BSP's easy money campaign?

Ironically, the same media and establishment experts have been unanimously silent about the June 17th Ayungin Shoal incident, which involved a standoff between the Philippine and Chinese Coast Guard.

The incident could have triggered World War III—had the US agreed with the Philippines' interpretation, activating the 1951 Mutual Defense Treaty. Unfortunately, the US implicitly gave a cold shoulder to the Philippines, forcing the latter to negotiate and deal with Chinese authorities over the South China Sea. Naturally, the US is opposed to this.

The same echo chamber has been observed ignoring the ongoing shift to a war economy through its embrace of war socialism.

Superstitions are given precedence over facts that matter, translating to the brazen hoodwinking of the public that fomenting war is good for the economy while Ghosts will scare the wits out of investments. 

Won't a war lead to a partial transformation of the living population into ghosts? 

Yet, who would invest in a country on the brink of war? Who would like to see their investment ownership evaporate when enemy drones start wreaking havoc on crucial social, economic, and political edifices, exacting a heavy toll on life and disrupting the division of labor?

But don't worry, stocks and real estate will boom! 

Sorry, but that’s an absolutely stunning imbecilic logic. 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump

The scarcity of local volume translates to amplified vulnerability to volatile foreign sentiment, mercurial fund positioning, and flows. 

Proof?

The massive +4.7% rally by the Japanese yen $USDJPY stole this week’s thunder.

It smashed what the consensus called the “unstoppable” force, a speculative mania. 

To amplify its policy, the Bank of Japan (BOJ) reportedly timed its $36 billion intervention in July to coincide with softening signs in the US economy.

Furthermore, the Chinese yuan $CNY also rebounded by 1.1% week-over-week (WoW). The US dollar index fell by 1.1%. 

The unraveling of the yen and yuan carry trades unleashed a wave of de-risking and deleveraging that rippled across the globe.

Figure 6 

Asian currencies posted substantial gains. (Figure 6, topmost graph) 

The Philippine peso rallied by 0.46%, with the $USDPHP closing at 58.08 and looking poised to fall below the 58 levels and retest the 57.5 area this coming week.

The Philippines led the rally in ASEAN bonds. (Figure 6, middle window) The sharp fall in the 10-year Philippine bond yields strengthens the view that the BSP is about to cut rates.

Furthermore, as signs of mounting strains in the economy emerge, the "belly" of the Philippine treasury curve has also inverted—meaning yields of 2-to-7 year notes have dropped below the 1-year note and partly below the 6-month T-bills. (Figure 6, lowest chart)

Philippine treasuries appear to be defying the BSP’s projected increase in inflation.

Figure 7

The unwinding of the carry trades sent the Japanese stocks crashing.  The yen’s massive rally coincided with the Nikkei 225’s 5.81% nosedive last Friday, to register its 2nd largest one-day decline after the Black Monday crash of October 1987.  The Nikkei was down 4.6% WoW. (Figure 7, topmost and middle charts)

Asian stock markets closed mostly lower. Eleven of the nineteen bellwethers posted deficits, with an average decline of 0.47%. Aside from Japan, the most significant weekly declines were led by Taiwan and the Philippines.(Figure 7, lowest graph)

All of this indicates the magnified contagion risks associated with asset booms driven by financial leverage.

Figure 8 

Risks in the ‘periphery’ have reached the ‘core.’ 

The race to a series of record highs by the S&P 500 $SPX has echoed the PSEi 30’s muted rally in 2024. With the SPX down, the PSEi 30's SONA pump has started to wobble. (Figure 8, highest image)

Foreign outflows of Php 1.6 billion this week have partly resulted in the PSEi 30’s 1.79% decline.

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system.

The SONA pumps of 2022 and 2023 not only surrendered all their gains; more importantly, the PSEi 30 closed lower than its base at the start of the pumps. (Figure 8, middle graph)

If history rhymes, the PSEi 30 could fall below its June 21st low of 6,158 during this SONA cycle (post-SONA dump).

Further, when the Philippine peso rallied in 2018 (USD PHP trended lower), it marked the onset of the PSE’s bear market. Will history repeat? (Figure 8, lowest chart)

Importantly, weren't we repeatedly told that easy money would fuel the embers for the rocketing of asset gains?

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References

Prudent Investor, The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects, July, 21, 2024

Bangko Sentral ng Pilipinas, Q1 2024 Domestic Claims of Other Financial Corporations Rise by 2.8 Percent QoQ and 12.9 Percent YoY, July 31, 2024

Ben S. Bernanke, A Crash Course for Central Bankers, ForeignPolicy.com, November 20, 2009

  

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

 

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

In this issue:

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

I. The Incredible Q1 2024 FOMO in the PSEi 30

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

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

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

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

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

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

VIII. Q1 2024 Financial Performance by Sector

IX. Q1 2024 Financial Performance by Members

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

XI. Summary and Conclusion

 

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

 

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

 

I. The Incredible Q1 2024 FOMO in the PSEi 30

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Nota bene: 

 

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

 

-The older data also excludes data revisions.

 

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

 

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

 

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

 

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

 

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

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

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

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

Figure 1

 

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

 

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

 

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

Figure 2

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Incredible.

 

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

 

Nevertheless, the mounting strains on consumers were conspicuous.

 

Figure 3

 

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

 

First, the non-food and construction retail chains.

 

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

 

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

 

Next, the biggest food retail chains.

 

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

 

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

 

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

 

Once again, this slowdown comes despite the added capacity!

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

 

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

 

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

 

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

 

Rising accounts of vacancies were reflected in their sales.

 

Figure 4

 

Lastly, the biggest real estate companies.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Amazing rationalizations.

 

In any case, have the wealthy embraced parsimony?

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

VIII. Q1 2024 Financial Performance by Sector

 

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

 

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

 

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

 

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

 

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

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

IX. Q1 2024 Financial Performance by Members

Figure/Table 5

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

 

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

 

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

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

 

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

 

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

 

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

Figure 6

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

 

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

 

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

 

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

 

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

 

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

 

XI. Summary and Conclusion

 

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

 

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

 

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References:

 

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

 

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

 

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