Showing posts with label market cycle. Show all posts
Showing posts with label market cycle. Show all posts

Sunday, September 15, 2024

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

 

Sunday, July 03, 2022

Boomers Drive Digital Trading Growth as PSE Hits Record Stock Market Accounts in 2021

When you net out all the assets and liabilities in the economy, the only thing left - the true basis of a society's net worth - is the stock of productive investment, education, and resources it has accumulated to provide for its people. Market cap is not aggregate "wealth."—John P Hussman, Ph.D 

 

In this issue 

Boomers Drive Digital Trading Growth as PSE Hits Record Stock Market Accounts in 2021 

I. PSE Posts Record High Stock Market Accounts in 2021; Boomers as Prime Drivers 

II. Stagnating Traditional Accounts, Rising Broker Risks 

III. Other Barriers to Growth: Gaming the Index, Price Volatility and Distortions 

IV. Financial and Economic Angst Prompted the Retail Stampede into Stocks 

V. Insights from the Report 

 

Boomers Drive Digital Trading Growth as PSE Hits Record Stock Market Accounts in 2021 

 

I. PSE Posts Record High Stock Market Accounts in 2021; Boomers as Prime Drivers 

 

So who says the Boomer generation is technology averse?  

 

Because of the surge in the use of online platforms, the new accounts inundated the Philippine Stock Exchange (PSE). And boomers were part of the growth drivers! 

 

 

Figure 1 

In 2021, the PSE noted in its "Stock Market Profile 2021" that the stock market accounts jumped by 15.98%, the second-highest growth rate from 2018. (PSE, 2022) (Figure 1, topmost pane) 

 

In nominal terms, 223,264 new accounts from its network of brokers represented the highest ever! 

 

Hands down, this growth almost entirely sprang from online platforms, which soared by 23.8% or a net 222,384.   

 

To simplify, online trading signified 99.8% of 2021's increase, pushing its share of the stock market accounts to an unprecedented 72%! (Figure 1, middle pane) 

 

Two age groups posted the best gains in online trading in 2021. 

 

The share of the seniors soared to 11.5%, more than double its 4.3% pie in 2020. This group is likely to have the most savings.  

 

The 18-29 age group placed second. It posted an increase to 41.2% share from 26.8% in 2020, a 53.7% surge.  

 

Interestingly, the age categories representing 30 to 44 and 45 to 49 registered significant decelerations. 

 

II. Stagnating Traditional Accounts, Rising Broker Risks 

 

There was barely any growth in the traditional brokers, which saw an increase of 430 accounts or .09%. 

 

Yet there are only 33 brokers with online facilities in a field of 125. These numbers infer that while 26% of brokers are vying for growth, the dominant brick-and-mortar model with the online platform and themselves for a stagnant base of clients. 

 

Figure 2 

In this precarious environment of falling volume and a bear market, the survival of the old model hinges on operating efficiencies. Otherwise, some of them could be at risk. 

 

Beyond the marked improvements in participation, the broader picture indicates that these are due to the low base effects. 

 

The aggregate 1.62 million accounts of the PSE represent a paltry 1.5% of the estimated total population of 110.8 million or 3.4% of the 47.7 million labor force population over the same period.  

 

These represent the direct accounts.  It excludes indirect equity exposures through the buy-side institutions in the form of mutual, UITFs, and other trust funds.  

 

That is to say, the thrust to attain deep and efficient capital markets remains a distant dream. 

 

III. Other Barriers to Growth: Gaming the Index, Price Volatility and Distortions 

 

But many significant obstacles emerge from current conditions. 

 

It is not just the flagging volume. The low penetration level widens the bid-ask spread, increasing transaction costs. 

 

The dwindling trading volume is a symptom of financial liquidity, a byproduct of monetary policies intended to bail out the banking system. The liquidity spillover from the BSP's 2020 historic Php 2.3 trillion injections expanded the PSE's peso volume in 2021. The listing of several REIT firms helped bulge the PSE's output. Liquid to assets ratio of banks coincides with the bump in peso volume. (Figure 2: topmost and second-highest window) 

 

More significantly, the low penetration level magnifies incidences of pre-closing pumps of share prices of several members of the PSEi 30, with the possible intention of artificially propping up this benchmark by an undisclosed cabal. Perhaps these outfits represent the counterparts of China's 'national team.' 

 

While consensus only sees its benefits, they ignore its costs.  

 

Pronounced volatilities are not only the cost of managing price levels of stocks.  

 

The more significant impact is the price signal distortion, which sends wrong signals to the economy resulting in the massive misallocation of resources. 

 

IV. Financial and Economic Angst Prompted the Retail Stampede into Stocks 

 

The present bear market poses another challenge.  

 

The record growth in the number of participants occurred even as the PSEi 30 reported a slightly negative return of .24% in 2021. Retail accounts probably chased the 2H rally going into 2022. (Figure 2, second to the lowest pane and lowest window) 

  

The sluggish economy, lingering joblessness, and negative 'real' rates from the monetary policies of the BSP may have induced many to use their savings to speculate. 

 

An international study showed that the pandemic "spawned a new breed of retail investors, of whom many are from emerging markets, relatively younger but with less money at their disposal, transacting remotely and keen on digital assets." (2022, April 22, Business Inquirer) 

 

The Global Retail Trends Report found that "lockdowns and working remotely resulted in “remote investing” not only in advanced markets but in emerging markets as well." 

 

They cite the Philippines: "In the Philippines, 48 percent of respondents belong to this new generation of investors or those who started out after the onset of the pandemic—well above the global average of 35 percent. Many among these new investors have less than $10,000 at their disposal and, among Filipinos surveyed, 39 percent were motivated by their ability to start with a small amount. Also, more than half of Filipino respondents opened their most recent investment account via a mobile app or through a smartphone, and 30 percent made their first investment in a digital asset." 

 

This study matches the changes in the demographic dimension, which reported a surge in the age category of 18-29 years.  

 

Figure 3 

 

The PSE report exhibited a surge in unemployed traders. Interestingly, 2021 reinforced the downtrend in self-employed retail accounts. (Figure 3, higher window) 

 

Perhaps, enhanced volatility also became an attraction, cultivating the impression that gambling can signify an alternative source of income. 

 

Needless to say, the surge in new stock market accounts hardly signifies positive news.  

 

Instead, it is a symptom of desperation as hard-pressed individuals have sought anodyne from the stock market in the hope of benefiting from speculation.  

 

And the pang from the mounting losses could lead to depression should the markets persist in heading south.  

 

V. Insights from the Report 

 

There are several insights from this report. 

 

1. Neither hopium nor panic constitutes a strategy.  

 

In bear markets, as a Wall Street axiom goes, "Markets descend on the ladder of hope."  

 

The anchor for both is emotions than reasoning. 

 

2. There are principal-agent problems potentially embedded in financial institutions promoting investments. They may not be looking at the interest of their clients.  

 

Instead, operating under current conditions, they could be promoting investments to create a counterparty to allow them to exit. 

 

Fees and commissions comprise their principal sources of revenue, which implies dependence on quantitative rather than qualitative metrics.  

 

3. The PSE has shifted to digital. It cemented its position by giving up its trading floor last June 24th. For the industry, it means that to grow, embracing digital trading is a prerequisite 

 

4. The general strategy of the industry is to promote buy-side products to clients. Or, the saving public becomes entirely dependent on the discretion of fund managers. Unfortunately, most of them were oriented to see markets and economics in the direction of the eternity of easy money policies. 

 

They maybe practitioners of this adage.  

 

"A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him. It is necessarily part of the business of a banker to maintain appearances, and to confess a conventional respectability, which is more than human. Life-long practices of this kind make them the most romantic and the least realistic of men." (Keynes, 1932) 

 

5. Yet, there remain pockets of growth overall.  

 

In select age groups, the potentials are in the savings-rich Boomers, even for traditional accounts.   

  

Also, with the lopsided concentration of new accounts in Metro Manila, the urban areas of the other regions may function as growth corridors. (Figure 3, lowest window) 

 

The irony is that this extreme clustering showcases the lack of confidence in the stock market outside 'imperial' Manila, possibly a ramification of a combination of lack of understanding or education. Moreover, stocks are hardly viral for people who got burned or had an adverse experience.  

  

Foreign retail accounts are also potential targets for account generation.  

  

But timing the market cycle is necessary for such a setup. Or, the best time to solicit new accounts is when the market has bottomed or is close to bottoming.  

 

Without understanding market cycles, promoting stocks may only backfire.  

 

________ 

Bibliography 

 

CORPORATE PLANNING AND RESEARCH DEPARTMENT (May 2022), Stock Market Profile 2021, May 2022, PSE.com.ph 

 

2022, April 22 Digital investors rise in PH amid pandemic–US study, Business Inquirer 

 

Keynes, JM (1932), The Consequences to the Banks of the Collapse of Money Values (Aug. 1931), Essays in Persuasion, Economics Network.AC.UK