Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

The stock market's job is to always make you feel like you are missing out on something. The stock market's job is to always make you feel like you should be doing something. The stock market's job is to get you to do the wrong thing at the wrong time—Ian Cassel

In this issue 

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

I. A Lowly Voice in the Wilderness

II. January as Template for 2025 Performance

III. Double Top Pattern?

IV. Was The Selloff Driven By Escalating Liquidity Strains? San Miguel: The Canary in the Coal Mine?

V. Price Distortions from the Changes in PSE’s Membership Amplified the Market’s Volatility

VI. Summary and Conclusion

Philippine PSEi 30’s Crash: Worst January Performance Since 2008 and Asia’s Laggard — A Liquidity-Driven Meltdown?

The Philippine equity benchmark plummeted 10.2% in January, making it the worst performer in Asia. It was also the largest loss in the history of January since 2008. Could escalating liquidity strains be the driving force?

I. A Lowly Voice in the Wilderness 

First, the appetizer. 

Let’s revisit a few quotes from our previous posts when everyone was predicting a new bull market for the PSEi 30, with expectations of it reaching 7,500 in October. (bold and italics original) 

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. August 4, 2024 

...

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. September 15, 2024

... 

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. October 7, 2024 

...

Given the current global and domestic economic imbalances, the Year of the Snake may again usher in another period of heightened risk and potential volatility. January 19, 2025 

Next, the main course.

II. January as Template for 2025 Performance

The Philippines' main equity benchmark, the PSEi 30, plunged by 4.01% on the last trading day of January, dragging its weekly return to -6.9%, marking its fourth consecutive week of decline.

Figure 1

For the month, the PSEi 30 suffered a 10.2% loss Month on Month (MoM), its most significant monthly decline since the 12.8% crash in September 2022. Annually, it was down by 11.8%.

January is supposed to be the best month for the PSE, rising 9 times in 13 years, with an average return of 0.94%, including 2025.

Yet, returns have been declining both monthly and annually for the past decade and so. (Figure 1, upper window) 

True to the volatility of the Snake Year, 2025's 10.2% plunge on January 10 was the worst since 2008, during the Great Financial Crisis, which resulted in a 48% decline and the lowest PSEi 30 level since 2012. (Figure 1, lower image) 

Yet, if history were to rhyme, and if January’s performance serves as a template for 2025, it wouldn’t be surprising if the PSEi 30 faces a substantial setback.

Figure 2

As a result of this week’s thrashing, the Philippine PSEi 30 was the worst-performing Asian bourse. Ten of 19 national indices were down, one remained unchanged, with average returns at -0.41%. (Figure 2, topmost graph)

For January, with 10 of 19 national indices down and a YTD change of -0.5%, the Philippine PSEi 30 was the region's laggard. (Figure 2, middle chart)

Major ASEAN bourses, such as Thailand’s SET and Malaysia’s KLCI, were the weakest links in both weekly and monthly outcomes. (Figure 2, lowest diagram)

Could these be emerging signs of an Asian Financial Crisis 2.0?

III. Double Top Pattern? 

This week’s meltdown breached two minor support levels and now seems poised to challenge the October 2022 low.

Figure 3

From a technical analysis standpoint, the PSEi 30 is facing the potential of a 'double top' pattern, where a breakdown below the October low could lead to a retest of the March 2020 level. (Figure 3, upper image)

The panic selling suggests that a significant oversold rebound might be imminent, though the durability of this recovery could be suspect.

IV. Was The Selloff Driven By Escalating Liquidity Strains? San Miguel: The Canary in the Coal Mine?

Mainstream explanations for the selloff have often been influenced by the availability bias or "when people overweight new information or recent events" (Investopedia)

Could the recent sell-offs be attributed to the substantial shortfall in Q4 and 2024 GDP (a development we had anticipated)? 

Was it influenced by Trump's tariff threats or the Federal Reserve's pause in their easing cycle? 

Or might domestic politics play a role? Specifically, the threat by the BBM administration to shut down the government if the Supreme Court rules in favor of appellants challenging the constitutionality of their controversial budget, or the impending Food Emergency Security measure on rice, set to be implemented on February 4, 2025. 

Our best guess is that while these factors might have some influence, a more critical driver of the market turmoil could be the escalating pressures on financial liquidity. 

Unlike the 2022 episode, where inflation and rising interest rates were significant factors, the current scenario mirrors the dynamics of the pandemic recession—where the PSEi 30 declines despite monetary easing aimed at combating a recession. (Figure 3, lower graph)

Currently, the GDP growth rate has been decelerating.

Figure 4

Moreover, bank liquidity has been worsening as of November, due to investments in Held-to-Maturity (HTM) assets and undisclosed Non-Performing Loans (NPLs). The cash-to-deposits and liquid assets-to-deposits ratios have been on a long-term downtrend, with the former at its lowest level in over a decade. (Figure 4, topmost graph) 

As a reminder, the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus. 

Contrary to mainstream expectations, the BSP’s accommodative monetary policy has led to an increase in Treasury bond yields rather than a decrease. (Figure 4, middle image) 

This rise is influenced not only by the Federal Reserve's policies but also by domestic inflation, which has been incrementally rising. 

Additionally, the yield curve for local Treasuries has steepened significantly, indicating heightened inflation risks. (Figure 4, lowest chart) 

Lastly, San Miguel’s deviation from the recent market uptrend might have served as the canary in the coal mine, signaling potential broader market distress. 

Also from last October 7, 2024 

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?

Figure 5

San Miguel’s share price was one of the biggest casualties, diving below the panic levels of March 2020.  (Figure 5, upper window) 

Its market capitalization plunged to Php 155 billion while grappling with a debt of Php 1.477 trillion. Falling equity and rising debt—what could go wrong? 

Could there be domestic funds facing liquidity constraints, forced to raise cash quickly by selling at any price?  And has this liquidation exacerbated San Miguel’s financial dilemma?

V. Price Distortions from the Changes in PSE’s Membership Amplified the Market’s Volatility

Lastly, the reconstitution of the PSEi 30 has contributed to market volatility.

The inclusion of AREIT and China Banking Corporation (CBC), which will replace Wilcon (WLCON) and Nickel Asia (NIKL) effective February 4, 2025, resulted in steep declines for the outgoing stocks: WLCON fell 10.16%, and NIKL plummeted 30.2%. (Figure 5, lower graph)

Meanwhile, funds tracking the PSEi 30 rotated into CBC (+33.81%) and AREIT (+4.74%).

Figure 6

Fundamentals hardly explain the irrational share price behavior of the affected firms. 

CBC’s parabolic move has turned it into a meme stock or crypto, even as the share prices of its peers have tumbled.

In the meantime, it also doesn't explain the sharp drop in NIKL's price. Although nickel prices have been on a downtrend, they have not collapsed. (Figure 6 topmost pane)

Shares of competitors FNI and MARC were down 1.96% and 8.96%, respectively, WoW. (Figure 6, middle graph)

In short, the PSE's proclivity to chase top performers while discarding laggards has only amplified the price distortions within the PSEi 30. 

VI. Summary and Conclusion

The January 2025 meltdown has brought to light the deteriorating fundamentals underlying the Philippine financial markets and economy. 

This crisis is not isolated to the Philippine Stock Exchange (PSE) but also resonates with some ASEAN counterparts. Could this be emerging signs of Asian Crisis 2.0? 

If historical trends of January and the volatility associated with the Year of the Snake are to repeat themselves, and if the double top pattern materializes, this suggests a significant deficit or loss for the PSEi 30 by the end of 2025. 

Could the recent turmoil in the PSEi 30 be indicative of escalating liquidity pressures among domestic fund managers? 

If this is the case, future stress could manifest in the treasury market and influence the US dollar-Philippine peso exchange rate $USDPHP. 

Certainly, given that the PSEi 30 has become heavily oversold, a notable rebound might be anticipated. However, this scenario presents not an opportunity for accumulation but rather for liquidation. 

Unless one is an expert in scalping, short-term trades involve significant risks (Figure 6, lowest chart)

Remember, cash remains the best defense against a bear market—whether through foreign exchange (FX) accounts or Treasury bills (T-bills).

___ 

Disclosure: The author holds a small position in NIKL as of the time of writing.

Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE?

 

Every Ponzi is sold as a non-zero sum store of value. Every Ponzi investor believes the investment is a non-zero sum store of value—Nassim Nicolas Taleb

Is San Miguel’s Ever-Growing Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? 

San Miguel’s Q3 and nine-month sales performance validated the signs of a weakening economy. However, while the company reduced its debt from Php 1.484 trillion to Php 1.477 trillion, its practices exhibit symptoms of Minsky’s Ponzi finance.

I. San Miguel’s Slowing Sales Resonated with the Economy 

San Miguel’s 9-month sales performance demonstrates the weakening of the Philippine economy which was not limited to consumers.  

Given the current loose economic conditions, supported by the first BSP rate cut and the "Marcos-nomics" stimulus, it is surprising to see a contraction in cement and real estate revenues, as well as a downturn in infrastructure sales growth. For a company that has shifted its business model to rely heavily on political projects or enterprises, this downturn should be a cause for concern. 

Additionally, the consumer spending slowdown was pronounced in the context of declining food and packaging sales—which eked out marginal growth. 

SMC reported a Q3 revenue increase of only 3.9%—which would be flat once adjusted for inflation! 

Q3 sales pulled down the 9-month revenue growth, which clocked in at 11.2%.

In any case, despite a slight drop in margins, SMC reported income growth of 18.9%, amounting to Php 37.1 billion.

Despite this income growth, SMC’s outstanding debt fell only by Php 7.43 billion to Php 1.477 trillion from its 1H historic high of Php 1.485 trillion. 

II. San Miguel’s Incredible Short-term Debt Recycling, Deeper Signs of Ponzi Financing? 

However, this situation appears to be a result of smoke and mirrors, as the heavily leveraged holding firm raised approximately Php 71.4 billion through various preferred share issuances by its subsidiaries to bridge its financing gap. 

The issuance of preferred shares has potential impacts on common shareholders. Preferred shares typically have priority over common shares in receiving dividends and claims to assets. As a result, common shareholders may see reduced dividends, as preferred shareholders must be paid first. In the event of liquidation, preferred shareholders also have a higher claim on assets. 

A closer look at their cash flow statement reveals a striking example of debt recycling, reminiscent of Hyman Minsky’s "Ponzi finance." 

SMC borrowed an additional Php 110 billion in short-term debt, bringing the total to Php 933.794 billion, to pay off a rising Php 898.657 billion in loans. 

Professor Minsky described this as "Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts" (Hyman Minsky, 1992) 

Incredible! 

SMC’s Q3 interest payments rose by 10% to Php 25.05 billion, marking its second-highest level.

Although SMC reported a 6% increase in cash, amounting to Php 15.9 billion and totaling Php 281.2 billion, this figure remains significantly lower than its short-term liabilities of Php 383 billion, which raises the firm’s liquidity risks. 

III. Is SMC’s Debt the "Sword of Damocles" Hanging over the Philippine Economy and the PSE? 

To put this in perspective, SMC’s 9-month 2024 Php 1.477 trillion debt is equivalent to 6.6% of the estimated 2024 GDP and 4.5% of total financial resources (Q3). 

It is a telltale sign of the expanding concentration risk in the economy, or the 'too big to fail' phenomenon. What could go wrong? 

Its opportunity costs translate into either productive lending to the broader economy or financing competitiveness among SMEs. 

This also means that even at zero interest rates, the mounting scale of Ponzi finance or debt recycling is virtually unsustainable. 

It would likewise be a blatant mistake to assume that "what happens in SMC stays in SMC." 

As a counterparty to lenders, a liquidity crunch or potential insolvency won’t just affect the health of the banking system, the fixed-income market, or, indirectly, the Treasury markets—it could have broader economic and political repercussions. 

A liquidity squeeze could affect both direct and indirect industry and consumer linkages to SMC’s businesses.

Moreover, a political decision to bail out SMC would likely fuel inflation, which would come at the expense of the Philippine peso.

Sadly, could SMC represent the proverbial "Damocles' Sword" hanging over the Philippine economy, the financial system, and the Philippine Stock Exchange?

Interestingly, SMC share prices appear to have recently behaved like a pegged currency, with entity/ies defending the lower band (price floor) during the 5-minute pre-close period for several days, maintaining the Php 88 level (as of November 29) Previously, the lower band was at around Php 88.7.

___

reference  

Hyman P. Minsky The Financial Instability Hypothesis The Jerome Levy Economics Institute of Bard College May 1992

 

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

 

The short end of the UST curve is highly influenced by the Federal Reserve’s monetary policies while the long end clarifies those policies through the prism of risk/return. A steep yield curve…is one that suggests a low rate, accommodative monetary policy that is likely to work over time. This accounts for the curve’s steepness. A flat and inverted curve is the opposite. Whatever monetary policy is being conducted, the long end is interpreting that policy as well as other conditions as being highly suspect—Jeffrey P Snider 

In this issue:

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion!

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion!

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion? 

BSP Reduces Banks' Reserve Requirement Ratio (RRR), Fed's 50-bps Rate Cut Sends Philippine Yield Curve into Full Inversion! 

The Philippine yield curve inverts as the BSP significantly reduces the Bank RRR, while the US Fed embarks on a "Not in Crisis" 50-bps rate cut. 

The BSP has been telegraphing cuts to the banking system’s Reserve Requirement Ratio (RRR) since its last reduction in June 2023. 

For instance, Philstar.com, May 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking at a significant reduction in the level of deposits banks are required to keep with the central bank after it starts cutting interest rates this year, its top official said. BSP Governor Eli Remolona Jr. said the Monetary Board is planning to cut the reserve requirement ratio (RRR) of universal and commercial banks by 450 basis points to five percent from the existing 9.5 percent, the highest in the region. 

Four months later. 

GMANews.com, September 18, 2024: The Bangko Sentral ng Pilipinas (BSP) is looking to cut the reserve requirement ratio, the amount of cash a bank must hold in its reserves against deposits, “substantially” this year and reduce it further in 2025. BSP Governor Eli Remolona Jr. said on Wednesday that the cut in the reserve requirement is being considered, with the timing being discussed. He earlier said this can be reduced to 5% from the present 9.5% for big banks. 

Two days after. 

ABSCBNNews.com, September 20, 2024: The Bangko Sentral ng Pilipinas is reducing the reserve requirement ratio (RRR) for universal and commercial banks by 250 basis points (bps).  This RRR reduction will also apply to non-bank financial institutions with quasi-banking functions, the BSP said… The reduction shall bring the RRRs of universal and commercial banks to 7 percent; digital banks to 4 percent; thrift banks to 1 percent; and rural and cooperative banks to zero percent, the central bank said. The new ratios take effect on October 25 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs. (bold mine) 

I. 2024 Reserve Requirement Ratio Cuts to Designed to Plug the Banking System’s Worsening Illiquidity 

Bank lending growth has been accelerating, while broad economic liquidity measures have been rising, so why would the BSP opt to inject more liquidity through Reserve Requirement Ratio (RRR) cuts? 

The following data set may provide some answers.

Figure 1

Although lending by Universal and Commercial Banks is at a record high in nominal peso terms, the growth rate remains far below pre-pandemic levels. (Figure 1, topmost image) 

The RRR cuts from 2018 to 2020 appeared to have worked, as the loans-to-deposit ratio rose to an all-time high in February 2020 but the pandemic-induced recession eroded these gains. (Figure 1, middle graph) 

It took a combination of historic BSP policies—record rate cuts, an unprecedented Php 2.3 trillion liquidity injection, and extraordinary relief measures—to reignite the loans-to-deposits ratio. Nonetheless, it still falls short of the 2020 highs. 

A likely, though unpublished, explanation is that bank liquidity continues to decline. 

As of July, the cash and due-to-bank deposits ratio was at its lowest level since at least 2013. The BSP policies of 2020 and subsequent RRR cuts bumped up this ratio from 2020-21, but it resumed its downtrend, which has recently worsened. (Figure 1, lowest chart)

Figure 2

After a brief recovery from the RRR cuts of 2018-2020—further aided by the BSP’s historic rescue measures in 2020—the liquid assets-to-deposits ratio has started to deteriorate again. (Figure 2, topmost pane) 

Additionally, Q2 2024 total bank profit growth has receded to its second-lowest level since Q2 2021. (Figure 2, middle diagram) 

From this perspective, liquidity boost from increased bank lending, RRR cuts, and reported profit growth has been inadequate to stem the cascading trend of cash and liquid assets. 

Furthermore, despite subsidies, relief measures, and a slowing CPI, Non-Performing Loans (NPLs) and distressed assets appear to have bottomed out in the current cycle. (Figure 3, lowest visual) 

Increasing NPLs in the face of a slowing CPI is indicative of demand. Refinancing has taken a greater role in the latest bank credit expansion. 

To wit, rising NPLs contribute significantly to the ongoing drain on the banking system’s liquidity. 

II. Bank Liquidity Drain from Held to Maturity (HTM) and Growing Non-Performing Loans (NPL)

Figure 3

A primary source of the downtrend in the cash-to-deposits ratio has been the banking system's Held-to-Maturity (HTM) securities. (Figure 3 upper image)

Once again, the BSP has acknowledged this. 

Banks face marked-to-market (MtM) losses from rising interest rates. Higher market rates affect trading since existing holders of tradable securities are taking MtM losses as a result. While some banks have resorted to reclassifying their available-for-sale (AFS) securities into held-to-maturity (HTM), some PHP845.8 billion in AFS (as of end-March 2018) are still subject to MtM losses. Furthermore, the shift to HTM would take away market liquidity since these securities could no longer be traded prior to their maturity. [BSP, 2018] (bold mine) 

Even though rates have dropped, HTM (Held-to-Maturity) assets remain at record levels but appear to be plateauing. Falling rates in 2019-2020 barely made a dent in the elevated HTM levels at the time. 

Yet, a principal source of HTMs continues to be the bank's net claims on central government (NCoCG). (Figure 3, lower graph) 

That is, banks continue to finance a substantial portion of the government's deficit spending, which has represented an elementary and major contributor to the deterioration in bank liquidity. 

Why has the BSP been doing the same thing over and over again, expecting different results? Some call this "insanity." 

If the goal is to remove distortions—however ambiguously defined—why not eliminate the RRR entirely? 

It seems the BSP is merely buying time, hoping for a magical transformation of unproductive loans into productive lending. Besides, a complete phase-out of the RRR would leave the BSP with fewer "tools," or bluntly speaking, strip them of excuses. 

Thus, they’d rather have banks continue to accumulate unproductive loans in their portfolios and gradually subsidize them with relief from RRR cuts, rate cuts, various subsidies, and later direct injections—a palliative/band-aid treatment. 

III. Philippine Yield Curve Shifts from an Inverted Belly to a Full Inversion! 

Figure 4

Rather than steepening, the Fed's "not in a crisis" panic 50-basis-point cut also helped push the Philippine Treasury yield curve from an "inverted belly" to a "full inversion" on September 20! (Figure 4, tweet)

Figure 5

While yields across the entire curve plunged over the week, T-bill yields declined by a lesser degree relative to medium- and long-term Treasuries. (Figure 5, topmost window)

As a result, yields on Philippine notes and bonds have now fallen below T-bills!

Although one day doesn’t make a trend, this current inversion is the culmination of a process that began with a steep slope, then an inverted belly, and now a full inversion since June 2024. (Figure 5, middle chart)

The spreads between the 10-year bonds and their short-term counterparts are at the lowest level since March 2019! (Figure 5, lowest graph) 

And an inverted curve could serve as a warning signal/alarm bell for the economy.

From Investopedia: 

>An inverted yield curve forms when short-term debt instruments have higher yields than long-term instruments of the same credit risk profile.

>The inverted curve reflects bond investors’ expectations for a decline in longer-term interest rates, a view typically associated with recessions.

Further, it is a sign of tight liquidity: short-term borrowing costs rise or remain elevated, leading to higher yields on short-term debt instruments compared to long-term yields.

Moreover, expectations of slowing growth or economic recessions can also lead to decreased demand for riskier assets and increased demand for safer long-term bonds.

Again, the inverted curve must have resulted from the BSP’s announcement of a sharp reduction in the RRR in October, along with the Fed’s 50-basis point rate cuts.

Bottom line: cuts in the banks’ RRR were meant to address the banking system’s liquidity challenges as manifested in the Philippine treasury markets. The Fed’s 50-bps rate cut has exacerbated these distortions.

IV. Was San Miguel’s September 20th Pre-Closing Dump Related to the Liquidity Strained Yield-Curve Inversion?

Figure 6

Finally, it is interesting to observe that following the PSEi 30's intraday push above 7,300 last Friday, September 20, foreigners sold off or "dumped" SMC’s shares by 5% during the pre-closing five-minute float, contributing to the sharp decline in SMC’s share price and diminishing gains for the PSEi 30. (Figure 6, tweet) 

While we can’t directly attribute this to the inversion of the Philippine term structure of interest rates (yield curve), SMC’s intensifying liquidity challenges—evidenced by deteriorating cash reserves relative to soaring short-term debt in Q2 2024—should eventually influence its slope. (Figure 6, lower chart) 

In sum, as a "too big to fail" institution, SMC’s difficulties will inevitably reflect on the government’s fiscal and monetary health as well as the banks and the economy. 

____

references

FINANCIAL STABILITY COORDINATION COUNCIL, 2017 FINANCIAL STABILITY REPORT, p. 24 June 2018, bsp.gov.ph

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

 

True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse sooner or later and to bring about a depression—Ludwig von Mises

In this issue: 

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP

II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?

III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt

IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example 

V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications 

VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity

VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability

VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility

IX. PSEi 30 1H Analysis: A Concise Industry Overview

X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income

XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals

Q2 2024 6.3% GDP? Stagnation in PSEi 30’s Q2 and 1H 2024 Performance as Debt-to-Income Ratio Soared to an All-Time High!

In a detailed analysis, we highlight the growing disconnect between PSEi 30 fundamentals (for Q2 and 1H 2024), PSEi 30 prices, and GDP.

I. Introduction: The Growing Disconnect Between PSEi 30 Fundamentals, Prices, and the GDP 

The PSEi 30 soared by 7.03% in Q1 2024, plummeted 7.12% in Q2, or was almost flat with a slight decrease of 0.6% in the first half of the year. 

However, two months into Q3, the PSEi 30 has fully recovered its Q2 losses and was up 7.94% YTD as of August 22nd.

Despite the fragile consumer conditions, owing to the "Marcos-nomics stimulus" channeled via record deficit spending, Q2 GDP rose to 6.3%.

Nevertheless, the dynamics in motion in Q1 extended through Q2 2024 and in the first half of the year.

In our conclusion last May, 

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. (Prudent Investor, May 2024) 

Let's compare the debt conditions of the non-financial members of the PSEi 30 with its entire constituents. 

However, there are some caveats regarding the presented statistics. 

Nota bene:  

-Older data, representing PSEi members of the specified Q2 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 Q2 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. 

II. 1H 2024: PSEi 30 Firms Insatiably Gorge on Debt: More Borrowing, More Trouble?

Figure 1

The table presented is an example of 1B data. It compares the recently published first half (1H) of 2024 numbers with the first half of 2023 figures of PSEi firms. (Figure 1, top table) 

The 2023 headlines and the rest of the historical data are referred to as 1A. 

Despite coming from a high base, the debt of non-bank PSEi 30 members increased by 5.9% or Php 308.5 billion to Php 5.535 trillion, which is the second highest on record, following last year's Php 5.6 trillion (1A). (Figure 1, middle graph)

The net debt increase of Php 308.5 billion was the fourth highest, after 2022, 2020, and 2023 (1A).

While fifteen of the 27 non-bank PSEi 30 firms posted increases in debt (1B), San Miguel’s eye-popping PHP 147 trillion accounted for 53% of the total. 

The other top borrowers were Ayala Corp (Php 46.3 billion), Ayala Energy subsidiary ACEN Corporation (Php 34.5 billion), and Aboitiz Equity (Php 26.85 billion). 

It's important to note that this discussion does not include the borrowings of PSEi 30 banks. 

The good news is that despite the massive debt increase, soaring bank assets have led to a reduced PSEi 30 Debt-to-Total Financial Resources ratio, which has dropped below 2019 levels. (Figure 1, lowest image) 

But here's the caveat: while bank assets outgrew the PSEi 30’s non-bank debt—partly due to the non-inclusion of bank debt data—banks still represent a substantial source of lending to PSEi firms.

Furthermore, the outperformance of bank assets has been driven by the steep growth in consumer credit exposure and holdings in Philippine government debt. 

Additionally, some companies may have tucked away debt through other classifications (e.g., lease liabilities) or via off-balance sheet arrangements, which may result in an understated actual debt position. 

Figure 2

For instance, while Wilcon Depot has no published debt, interest expenses (from lease liabilities) have been on an uptrend. (Figure 2, topmost chart)

In this way, understanding the mechanics behind the statistics can help strip away the façade of good news based on headline metrics.

III. PSEi 30: The Mirage of Profit Gains Amidst Explosive Rise in Debt 

Second, media headlines captivate their audiences by focusing on the percentage gains in revenues and income of the most prominent members of this elite group. 

However, they rarely mention that these gains largely stem from the illusion of the low-base effects.

In reality, these exciting profit gains represent only a small fraction of the increases in debt. 

In the first semester, the published net income of the PSEi 30 rose by a modest 4.36%, or Php 20.4 billion, reaching the second-highest level of Php 487.12 billion. 

Yet, this growth rate marks the slowest increase since 2021. (Figure 2, middle image) 

Net income of non-financial companies grew by 2.03%, with one-third of these companies experiencing a decline in profits.

Meanwhile, the headline performance was primarily driven by the big three banks, whose profit growth of 15.4% significantly boosted the overall.

In context, the non-bank debt growth of 5.9% eclipsed the PSEi 30’s net income growth of 4.36%. 

Crucially, the net debt growth of Php 308.5 billion represents a staggering 15.2 times the net profit increase of Php 20.4 billion! Fifteen times! An all-time High! (Figure 2, lowest pane)

Strikingly, as a proportion of income, the net debt growth of Php 308.5 billion accounted for 63% of the aggregate net income of Php 487 billion in the first semester! 

Essentially, this demonstrates the law of diminishing returns in action: while debt used to be a significant contributor to (demand) revenue and income growth, malinvestments have resulted in corrosive effects. 

Worse yet, unbeknownst to the public, this marks a substantial buildup in credit risks, channeled through balance sheet mismatches of the nation’s largest firms. 

Amazing. 

IV. PSEi 30: Caveats in Corporate Reporting and Governance: The PLDT 4-Year Budget Overrun Example

Another cautionary note is that elite firms may be prone to exaggerating their top and bottom lines to convincingly portray their financial viability to the public.

Furthermore, "errors" could also be a factor, reminiscent of the PLDT's 4-year "budget overrun" debacle. Local authorities drew a veil over the reporting fiasco of the largest telecommunications company and allowed them to escape unscathed, despite the company settling with plaintiffs of a class action suit for a paltry sum of USD 3 million. 

In our humble opinion, the PLDT case exemplifies the decay of corporate governance, where elite companies can evade accountability for misdeclarations (whether accidental or intentional). 

Instead of being transparent, they may choose to pay small fines, raising the question: what would prevent other elite companies from following suit?

V. BSP’s Inflationism: The Slowing Growth of PSEi 30 Revenues and Its Implications

Figure 3

Meanwhile, corporate revenues grew by 8.71% in the first semester (1B). Non-bank PSEi 30 expanded by 7.4% while bank revenue growth of 24.2% delivered the gist of the PSEi 30’s semestral expansion. (Figure 3, table)

Twenty-three of the 30 constituents posted positive YoY growth while seven saw a contraction. In pesos, San Miguel was the leader with an increase of Php 103.8 billion followed by JGS with Php 24.8 billion, BDO and BPI with Php 24.1 billion and Php 23.1 billion respectively.

1H revenue growth of 8.71% resonated with its equivalent in (nominal) GDP of 9.5%.  If the GDP numbers are close to accurate then PSEi 30’s share of revenues amounted to 27.8% of the NGDP. 

Yes, 30 firms accounted for over a quarter of the statistical economy in 2024.

And that's only the 30 firms—a hallmark of the trickle-down, plutocratic political-economic structure.

The slowing NGDP and PSEi 30’s revenue growth are symptoms and manifestations of the corrosive nature of the BSP’s inflationism, expressed through over-indebtedness and price instability, which negatively impact profits and liquidity.

Importantly, because this increases the public’s time preferences or short-term orientation, the public becomes inclined toward activities that cater to instant gratification, such as speculation and gambling.

This inclination also permeates into the political spectrum, raising the public’s desire for more interventions and resulting in the deepening politicization of the socio-economic sphere.

VI. Impact of BSP’s Inflationism: PSEi 30’s Deepening Signs of Illiquidity

This leads us to the fourth component: cash.

It is no surprise that the mounting imbalance between profits and debt has resulted in deepening signs of illiquidity, as the cash reserves of the PSEi 30 constituent firms continue to decline. (Figure 3, lower visual)

In addition to borrowing, PSEi 30 corporations have partially used their cash reserves to bridge the liquidity gap in their financing operations.

Yet, despite the massive borrowings, the aggregate cash reserves (1A) have fallen to their lowest level since 2021, with 14 of the 30 firms posting cash contractions.

Aboitiz Equity and gaming company Bloomberry recorded the largest cash decreases, while Meralco and LTG registered the most significant gains.

VII. San Miguel’s Intensifying Debt and Cash Crunch: Implications for Financial Stability

San Miguel’s situation appears to be a poster child for the entropic process leading to illiquidity and insolvency.

Despite the astonishing Php 147 billion surge in borrowing from the first semester of 2023 to 2024, and a published net income of Php 13.6 billion, SMC’s cash reserves fell by Php 8.31 billion to Php 253.9 billion—its lowest level since 2018. (And that’s assuming that the reported cash reserves are accurate)

Why wouldn’t it?

Figure 4

Short-term debt skyrocketed from Php 363.8 billion in 1H 2023 to Php 533.67 billion in 1H 2024, an increase of Php 169 billion! (Figure 4, topmost chart)

Both the level of short-term debt and the annual increase in short-term debt are all-time highs!

More importantly, SMC’s short-term debt now exceeds 100% of its cash reserves!

Additionally, interest payments, which amounted to Php 24.12 billion and counting, have not been included in this analysis.

In context, SMC’s Php 1.484 trillion in debt represents about 4.6% of the Php 32.33 trillion in total financial resources and 5.9% of the 2024 annualized Php 25.2 trillion NGDP! (Figure 4, middle and lowest charts)

Incredible.

In simple terms, SMC needs to generate funds to pay or refinance both its massive short-term and long-term obligations.

Rising interest payments will further erode its profits.

With vastly insufficient profits and cash flows, SMC will naturally have to draw on its most liquid reserves: cash.

The company may also need to increase its borrowing rate or resort to selling assets or dilute its equity to meet its operational liquidity requirements.

Keynesian economist Hyman Minsky theorized the transition from financing stability to instability phenomenon as "Ponzi Finance."

Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts. (Minsky 1992)

Regardless of interest rates, SMC’s debt stock has reached a fragile state, increasingly vulnerable to a bout of perilous illiquidity. 

If SMC cannot raise the required amount, it may exhaust all its cash or, alternatively, embark on a selling spree of its assets or dilute its equity.

New ventures like the Bulacan-based New Manila International Airport (NMIA) project are unlikely to generate sufficient cash flows to meet its skyrocketing obligations.

However, in our humble opinion, the company must convince the public that it is viable enough to continue with its borrowing orgy. 

Yet, what happens at SMC will not stay at SMC. A "tail event" for San Miguel could send shockwaves through the banking system, financial markets, and the broader economy—which relies on elite firms for GDP growth.

Of course, we would expect the BSP or the government to mount a bailout. However, doing so could accelerate other negative feedback loops in the financial system.

VIII. Analyzing the PSEi’s Impact on Financial Liquidity: The Surge in PSEi and Bank Borrowings Increases Financial Fragility

The PSEi’s mounting liquidity shortage has been mirrored in the banking system.

Figure 5

In the first semester, cash growth among listed banks increased by a mere 1.82% year-over-year (boosted by the big three of the PSEi 30 at 3.36%), while bills payable soared by 39.2% across all banks, driven higher by a 68.12% surge from the PSEi 30’s big three. (Figure 5, table) 

Nota Bene: BPI categorizes its borrowing under "Other borrowed funds," making the time element of its debt distribution ambiguous and therefore not included in our data. 

In any case, universal-commercial (UC) banks have ramped up their borrowing activities, with bills and bonds payable growing at accelerated rates of 40.62% and 11.78%, respectively, resulting in a total increase of 27.8% as of June. (Figure 5, middle graph) 

UC bank borrowings in pesos reached an all-time high of Php 1.401 trillion last June! 

UC banks have not only increased their borrowing but have also shifted focus to short-term debt, reflecting the industry’s deteriorating liquidity conditions. 

The long-term decline in cash-to-deposits and liquid assets-to-deposits ratios continued in June. (Figure 5, lowest diagram) 

Bank client issues are also reflected in the banks' health reflecting on liquidity conditions—despite the accounting charade surrounding Held-to-Maturity (HTM) assets and various relief measures that have obscured the actual conditions of Non-Performing Loans (NPL).

If banks are as profitable as claimed, why is financial liquidity deteriorating and why are borrowings at record levels? 

IX. PSEi 30 1H Analysis: A Concise Industry Overview

Figure 6

By industry, debt grew the most in the holding sector, while the property sector came in a distant second in the first semester. (Figure 6, top table)

The holding sector accounted for the largest share representing 74%, while the property sector 11%.

Similarly, banks generated the most significant net income gains, followed by the service sector.

Banks' net income comprised 61.6% of the total or the PSEi 30’s net income, while services had a 28% share.

The holding sector dominated revenue growth, with a share of 54.7%, while banks accounted for 21.9%.

Cash increased the most in the industrial sector, with banks in second place.

X. Q2 GDP Growth of 6.3% Highlights a Two Speed Economy: Stagnation in PSEi 30 Revenues and Net Income

Moving to the second quarter, "Marcos-nomics" powered the GDP growth of 6.3%.

The poor top-line performance of several PSE-listed firms, which have reported their Q2 2024 results, underscores this issue.

… 

Fifth and finally, the PSE-GDP data indicate that there is confusion in associating a high GDP with the performance of the PSEi 30, which is currently in a bear market. (Prudent Investor 2024) 

This context is further validated by examining the revenues and net income of the 30 elite companies in the PSEi 30, some of which are even involved in government projects. 

Whereas Q2 NGDP grew from 9.1% in Q2 2023 to 10.1% in Q2 2024, the PSEi 30’s gross revenues climbed from 8.24% to 9.14% over the same period, despite the significant increase in debt. (Figure 6, lower graph) 

Similar to the first half of the year, Q2 revenues of the elite firms, amounting to Php 1.799 trillion, signified 28% of the Q2 NGDP, which stood at Php 6.486 trillion—once more, the trickle-down, plutocratic political economy. 

Revenues grew, but there is a catch. 

The net income of the PSEi 30’s non-bank firms showed a slight decline of 0.13% year-over-year. 

However, the bank's net income, which expanded by 13.7%, boosted the aggregate net income growth to 2.35%. This figure represents gross net income.

Figure 7

Alternatively, the real net income for the PSEi 30 stagnated or even contracted by -1.45% in Q2 2024! That’s right; net income shrank. (Figure 7 top and bottom tables) 

Outside the banking and property sectors, there was hardly any increase in net income in real terms. 

Net income for thirteen of the PSEi 30 firms (43%) decreased in Q2. Semirara, DMC Holdings, GT Capital, JG Summit, and Bloomberry led this decline. 

Conversely, Ayala Corp, SM Investments, ICT, and Meralco led the gainers.

In the meantime, SMC and Meralco posted the most significant revenue gains, while DMC and Semirara experienced revenue contraction.

XI. The PSEi 30 Nears 7,000: The Widening Discrepancy Between Prices and Fundamentals

In line with global stocks, the PSEi 30’s relentless climb toward the 7,000 level has been primarily driven by the local version of the "national team" and supported by foreign funds, thanks to the "Powell Pivot" towards easier monetary conditions.

While this surge has largely been driven by price-multiple expansion or speculation, it has overlooked critical concerns that have been festering beneath the surface.

Or, stocks have departed from the ongoing stagnation in fundamentals.

However, if higher interest rates did not put a brake to the government's and the PSEi 30's insatiable debt absorption and immersion, easier money conditions will surely intensify it.

What could possibly go wrong?

___

References: 

Ludwig von Mises, OMNIPOTENT GOVERNMENT THE RISE OF THE TOTAL STATE AND TOTAL WAR, p.251; 1944 & 2010, Mises Institute, Mises.org

Prudent Investor Newsletter, Despite the PSEi 30 FOMO, Q1 2024 PSEi 30 Financial Performance Unveiled a Two-Speed Economy, May 19,2024

Hyman P. Minsky, The Financial Instability Hypothesis, p.7 Levy Economics Institute, May 1992, levyinstitute.org

Prudent Investor, Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump August 11, 2024