At its core, illusion is about momentum. To grow the crowd, action must intensify. It is all about the expectation of what is yet to come. Ponzi schemes must expand to be sustained—Peter Atwater
In this issue:
PSEi 30: Surging Prices as Criteria to Membership: ACEN and CNVRG in, EMP and DMC out
I. Are Marking the Close Pumps and Dumps a Global Practice?
II. Emperador, the Shortest PSEi 30 Stint? Converge, the Youngest Member?
III. PSE’s Primary Criteria for Inclusion to the PSEi 30: Surging Prices!
PSEi 30: Surging Prices as Criteria to Membership: ACEN and CNVRG in, EMP and DMC out
I. Are Marking the Close Pumps and Dumps a Global Practice?
From the Manila Bulletin (August 5): The Philippine Stock Exchange announced the recomposition of its benchmark index with the addition of AC Energy Corporation and Converge Information and Communications Technology Solutions, Inc. starting August 16, 2021. In a statement, the bourse said the two securities will replace DMCI Holdings, Inc. and Emperador Inc. in the 30-member PSEi. Companies that qualify for inclusion in the PSE are those with a free float level of at least 15 percent, ranks among the top 25 percent by median daily value per month for at least nine out of 12 months, and ranks among the highest in market capitalization. The PSE also takes into consideration relevant financial criteria when conducting the index review. For the July 2020 to June 2021 review, another consideration was the early inclusion of large issuances. “We reviewed the index policies of our peer exchanges and took note of provisions that will make our own policies more consistent with what is practiced globally. The policy revisions we adopted will continue to ensure the quality and integrity of the PSEi and sector indices,” said PSE President and CEO Ramon S. Monzon. Another policy amendment involves the company’s free float level, which should be at least 20 percent from the current 15 percent. This requirement will be implemented in the December 2022 index review to give listed companies ample time to satisfy this criterion. This rule aligns PSE’s index policy with the Securities and Exchange Commission’s (SEC) Memorandum Circular No. 13 Series of 2017, requiring companies conducting an initial public offering to have a minimum public ownership of at least 20 percent.
Figure 1
Let us serve some appetizers first before proceeding with the main course.
When has institutional marking-the-close pumps and dumps become a global practice or standard?
Which of the national bourses allow this practice? When intraday data of national bourses were available on Bloomberg, I have seen none. Bloomberg’s data is now gated (available only to paying subscribers).
Yet, these pumps delivered 55% of this week’s 4.3% low volume spike of the PSEi 30!
Notably, the successive pumps on the first two days of last week, amounting to 2.61%, could be among the largest three, if not a milestone. For the concerned interest groups, the index must not fall, no matter what. Desperate times call for desperate measures.
Meanwhile, the PSE Academy describes the Philippine Stock Exchange index 30 (PSEi), formerly the Phisix, as “a fixed basket of thirty (30) common stocks of listed companies, carefully selected to represent the general movement of the stock market. In other words, it is the benchmark measuring the performance of the Philippine stock market.”
As of August 6th, the top 5 largest market cap issues account for 47.93% of the index, which means price changes of these issues have a significant bearing on the index compared to the rest. The top 10 holds a 72% share.
The elite six are SM, SMPH, BDO, ALI, AC, and JGS. ICT barged into this roster with an 18.4% surge this week pushing JGS to the seventh spot!
Exactly how do price actions of the 5-6 biggest market cap issues supposedly "represent the general movement of the stock market"?
Are their fundamentals showing the same degree of distribution compared to other members of the PSEi 30?
Or specifically, is the % share of their aggregate market cap to the PSEi 30 in proportion to the other fundamental metrics such as revenues, earnings, cash, and debt? In the context of aggregate revenues and net income, the share of the 6-biggest market cap issues accounted for only 30% and 39% of the PSEi 30, respectively, based on the 2020 annual reports.
And since changes of the index are dependent on 5-10 issues, the remaining two-thirds, as benchwarmers are seemingly prone to the whims of the PSE.
To consider, while about 6 issues hold a substantial sway on the index, since the advent of 2021, the share of their cumulative peso volume averaged 24% of the mainboard and 34.19% of the 20 most actively traded issues. The low liquidity of the PSE primed the conditions for the gaming of the index.
Unfortunately, as a monopolistic platform provider and regulator, the PSE seems to have turned a blind eye to these.
And because all actions have consequences, not only does the quasi-price controls entrenched imbalances on the economic distribution through false signals, but it also compounds the skewed distribution of the free-float market cap weights of the index. In this way, distortions extend to the statistics relating to the PSEi 30 (e.g. PER and etc.)
The Wikipedia seems to agree: “As the PSE's only broad-base index, it is frequently seen as an indicator of the general state of the Philippine business climate, although its reliability as an indicator of the state of the broader Philippine economy has been put into question”
II. Emperador, the Shortest PSEi 30 Stint? Converge, the Youngest Member?
On August 5th, the PSE announced marginal changes in the composition of the benchmark equity indices.
Figure 2
Of the four issues, outgoing DMC Holdings [PSE: DMC] has the largest free-float level while sporting the smallest (full) market capitalization. On the other hand, incoming Ayala Energy Corporation [PSE: ACEN] has the biggest full market capitalization even when its free-float level is only 15.6%.
Figure 3
Interestingly, on the 17th of August 2020, or exactly a year ago, the PSEi 30 included the Emperador [PSE: EMP]. I don’t have access to the profile of each member of the PSEi, but my hunch is that EMP’s tenure could be the shortest on record.
In contrast, Converge Information and Communications Technology Solutions, Inc. [PSE: CNVRG] could be the youngest member of the 30-elite equity benchmark. CNVRG, listed on the 26th of October 2020, is less than a year old! (as of this writing)
The aggregate market cap share of ten holding firms dominates the index by a wide margin. As of August 6th, the share of the sector's free-float market cap was 38.6%. The property and banking sectors followed with 20.12% and 16.41% share, respectively.
And because the holding firm sector duplicates the exposure of their subsidiaries, this inflates the incomes, debt, and other FS metrics.
So paring down their ranks look pragmatic.
As it is, parent DMC follows its mining subsidiary Semirara, which exited the index last year.
The mining sector has no representative.
But is a third telco in the index a sensible choice?
Aside from declines in the % share of the other industries in the face of a recession, the policy responses to the pandemic powered the telco and energy share of the GDP higher in 2020.
For telcos, the forced adaptation from brick and mortar business models to remote work and telecommuting during the pandemic boosted their revenues.
However, as a service platform, its growth prospects remain anchored on the economic and financial conditions of households and businesses.
In any event, the sector’s outperformance is temporary and should realign eventually with the growth dynamics of its clients/consumers as socio-economic conditions normalize.
As of August 6th, the combined free-float share of PLDT and Globe was 37% of the service sector and 4.5% of the PSEi 30, which will be boosted materially by the inclusion CNVRG.
The same reasoning applies to the energy sector.
III. PSE’s Primary Criteria for Inclusion to the PSEi 30: Surging Prices!
Yes, we understand the PSE’s three elements required for a membership of the PSEi 30: Free float requirements from the current 15% to 20%, compliance with specific size and liquidity requirements, and lastly, adjustments to the rules for insertion wherein a listed company shall be included in the PSEi if it ranks 25th or higher and shall be excluded if ranks 36th or lower in terms of full market capitalization.
Size and liquidity requirements, free-float, and full market capitalization are interrelated.
Figure 4
Closing prices multiplied by the outstanding shares gives us the Full market capitalization. On the other hand, closing prices multiplied by the free-float adjusted or the “the portion of the outstanding shares that are freely available and tradable in the market, or those shareholdings which are non-strategic in nature” equals the Free-float market capitalization.
That is, price is the most significant factor in shaping a firm’s market capitalization. In turn, rising share prices, which are usually a magnet for crowds, generate self-reinforcing liquidity.
The higher the prices, the bigger the market cap, the greater chances for the inclusion to the PSEi 30 or preserving its membership status.
As of Friday, August 6th, in terms of free-float market capitalization, EMP and DMC were ranked 21st and 29th, respectively.
But as of the same period, both departing issues are significantly distant from their record highs, down by 37.33% and 65.54%, correspondingly. By these measures, the recent rallies of EMP and DMC were insufficient to attract crowds/liquidity.
Or, aside from other inconsequential factors, the crux for the choice of ACEN and CNVRG is likely because their share prices are at All-time highs.
That is to say, because of its penchant for the survivalship bias or picking contemporary winners, the PSE seems to be drawn to the allure of bubbles.
BLOOM’s cyclical actions serve as an example. The downside share price trend showcases its ejection in August 2016, while price resurgence ushered its readmission in February 2019. With BLOOM trending towards its nadir of 2016, will it be evicted anew?
Finally, with the entry of AC Energy (ACEN), the Ayala Group of companies expands its membership from four to 5 or a 16% share of the elite PSEi 30, the largest group. The mainstays are Ayala Corp, Ayala Land, Bank of the Philippine Islands, and Globe Telecoms, which have a combined free-float cap of 21.41% share (as of August 6th).
However, their main rival, with only 3-memberships, has an accrued free-float share of 33.71%, which is why they are in the top 5. ACEN’s inclusion will hardly dent the dominance of its main competitor, the Sy group.
Although the sectoral distribution may not resonate with the economy, the ownership construct of the member firms of the PSEi 30 displays the plutocratic structure of the economy instead. It also highlights the concentration of economic factors to a few politically privileged entities.
The present thrust towards centralization only reinforces this "trickle-down" structure. In contrast, the natural distribution of wealth requires decentralization and competition through economic freedom.
Yours in liberty,
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