Since man cannot live without miracles, he will provide himself with miracles of his own making. He will believe in witchcraft and sorcery, even though he may otherwise be a heretic, an atheist, and a rebel—Fyodor Dostoevsky
In this issue
PSEi 30 7,200: The Financial Bubble Triggered, The Race Between the PSEi and Bond Yields
I. Operation 7,200: Financial Bubble Triggered, Managed Rotational Pumps
II. Rationalizing 7,000 and Above
III. Have Index Managers Been Pushing a Catch up with Indonesia’s JKSE and Thailand’s SET?
IV. PSEi 30 Racing Against Bond Yields: Which will Prevail?
PSEi 30 7,200: The Financial Bubble Triggered, The Race Between the PSEi and Bond Yields
I. Operation 7,200: Financial Bubble Triggered, Managed Rotational Pumps
Last week, we predicted that banks would be the next target of orchestrated frenzied bidding.
Another sector seems to have been part of the fine-tuning program to help in the quest of Operation 7,000.
Even during the selloffs, Financials led by BDO soared in the last two trading days. Market cap weight of the financials increased modestly over the week.
PSEi 30: 7,000 level Breached, Mission Accomplished? After ACEN and CNVRG, WLCON Next? Are Banks the Next Bubble Sector? October 11, 2021
With the fantastic four on the sidelines, this week’s follow-up run, which delivered 4.44% returns, pushed the index beyond 7,200.
Figure 1
And the most interest-rate sensitive issues, banks, and real estate led the way. In essence, the big 6 cemented this hysteric push to 7,200.
People may describe the current moves of the composite members of the PSEi as a rotation.
In my humble opinion, the major equity index was engineered to reach the current levels.
Here is a backstory.
The most recent push towards 7,000 started with the entry of high-flying momentum stocks of ACEN and CNVRG into the PSEi 30 in mid-August. The price bidding frenzy spilled over to other firms of their respective sectors (telcos and energy). For instance, GLO and TEL picked up the momentum of CNVRG. But GLO’s incredible parabolic run puts it at par with the neophytes.
ICT's share prices, in the meantime, had been boosted by the supply gridlock that prompted a global shipping boom.
The vertical run of fantastic four (ACEN, CNVRG, ICT, and GLO), thus, fundamentally carried the PSEi 30 towards 7,000 while the heavyweights were on hiatus.
Figure 2
As evidence of increased attention, in terms of volume, the Fantastic Four has outclassed the top 6 heavyweights since September.
Last week, despite the corrections of three of the four high flyers, their 22.3% share of weekly volume continues to outpace the 16.33% of Big 6 (SM, SMPH, BDO, ALI, AC and JGS).
A week before, while the index closed slightly lower, a big jump in the share prices of BDO signaled that the Financials were the next target. Indeed, led by BDO, it was the turn of the 6 top heavyweights to push the index higher, cementing the gains above 7,000. Aside from BDO, the panic buying spread to the other financials of the PSEi 30.
In anticipation of the entry of WLCON, the parabolic moves likewise diffused into retail stocks.
So pushing sectors in rotation signified the overall strategy in the quest of 7,000-7,200.
II. Rationalizing 7,000 and Above
The heuristic for 7,213.46 is that this is all about reopening which is supposed to deliver something magical.
While the normalization should be good news, people seem to have forgotten about the entrenched imbalances from current and previous policies.
The massive push of asset prices has been resonant with the desperation to see the proverbial light at the end of the tunnel.
Valuations have been rendered obsolete. The average annualized 2021 PER of the PSEi 30 has rocketed to 30.5! The bet is that outstanding growth rates should overcome present valuation excesses. Yet, even if true, this would whet the appetite for more intense asset bidding mania. From this premise, markets will never clear.
Furthermore, with national elections ahead, a stock market boom should boost the popularity rating of the incumbent. The confidence from it suggests continuity if the anointed candidates are elected.
We read that the Philippines remains close to the lowest quintile in the international rule of law and, at worst, one of the rear end in Asia. If the protection of property rights remains vulnerable and fragile to political arbitrariness, how would this entice capital?
And under the current activist central banking system, inflationary policies induce yield chasing activities that redound to gambling.
So with depressed private sector commercial activities, people are being seduced to expend capital on unproductive activities. Easy money.
III. Have Index Managers Been Pushing a Catch up with Indonesia’s JKSE and Thailand’s SET?
Nonetheless, the 4.4% weekly advance of the local benchmark represents the biggest in the Asian region. All of a sudden, the PSEi 30 reversed its losing streak to produce a positive 1.03% year-to-date return.
Figure 3
Interestingly, the late mover PSEi 30 has caught up with Thailand's SET. Even more, the PSEi 30 seems to mirror Indonesia's JKSE, which has likewise caught fire. Year through October 15th, the PSEi 30s 1.03% trails SET’s 13.04% and JKSE’s 10.94%.
So are the index managers going to pump the PSEi 30 harder?
IV. PSEi 30 Racing Against Bond Yields: Which will Prevail?
Figure 4
Finally, the ADB Bonds Online provides a benchmark of credit risks through the national Credit Default Swaps (CDS). While ASEAN stocks have been bid, CDS spreads have begun to rise!
That is partly because of rising CPI and bond yields.
The yield spread of the Philippine 2-10 year benchmark continues to climb above the 2018 level. In 2018 the statistical inflation, the CPI, scorched at 6.7% for two months (September and October).
System leverage (public debt plus bank lending) boomed by 38.8% in 2 years and 11 months. Bank lending growth topped in the 3Q of 2017, plateaued in early 2018, then began its descend. Though this turned positive last August, a month doesn’t make a trend.
To accommodate this massive increase in leverage, under the guise of the pandemic, the BSP forced down rates to a historic 2.0, hoping that the banks tow this line.
But then again, 10-year yields have recently scaled past the highs of the year. It may be about to test the March 2020 pinnacle of 4.952%. To what extent can the system bear rates increases under the current environment?
So the debt-laden PSEi 30 appears to be in a race with the ascendant bond yields, which will prevail?
