Let me conclude with one of my favorite clichés—the French saying: “The more it changes, the more it’s the same thing.” I have always thought this motto applied to the stock market better than anywhere else. Now the really important part of the proverb is the phrase, ‘the more it changes.’ The economic world has changed radically and will change even more. Most people think now that the essential nature of the stock market has been undergoing a corresponding change. But if my cliché is sound—and a cliché’s only excuse, I suppose, is that it is sound—then the stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one—Benjamin Graham, Stock Market Warning: Danger Ahead! (1960)
In this issue
Year of the Ox, Year of Volatility and Inflation? The PSEi 30’s Secular Bear Market, Philippine Treasury Yields Surge!
I. Year of the Ox, Year of Volatility and Inflation?
II. Year of the OX Favors the USD Peso, Magnified Volatility in the PSE
III. The PSEi 30’s Secular Bear Market
IV. Stagflation Ahoy! Philippine Treasury Yields Surge, Widening Spreads, Pointing to Higher CPI and Prospective Tightening!
Year of the Ox, Year of Volatility and Inflation? The PSEi 30’s Secular Bear Market, Philippine Treasury Yields Surge!
I. Year of the Ox, Year of Volatility and Inflation?
Predictions based on Feng-shui have not been our cup of tea.
However, the Lunar year cycles, constituting the Chinese calendar, emit several interesting impressions.
Although interpreting periods covered by specific animal cycles on the notion that such year has distinct underlying conditions looks incredulous.
That is, reading tea leaves from it, on its own, are purely happenstance.
Figure 1
In the context of selected economic indicators are the GDP and inflation, if the past is to rhyme, the dominant character of the Year of the Ox has been volatility.
That’s because the year of the Ox played roles in the watershed events like the finale of the Philippine Debt Moratorium of 1983-85, the 1997 Asian crisis, and the culmination of the Great Recession of 2007-2009.
On that score, the year of the Ox represents a continuing dynamic from the year of the Pig and Rat.
Two years back, my insights on the year of the PIG
To recap on the 12-year cycle of the year of the pig:
1947-1949: Precursor to the Foreign Exchange crisis
1958-1960: Economic Slump (1959- year of the pig)
1969-1971: Balance of Payment crisis
1983-1985: Debt Moratorium/ Economic recession
1995-1997: Antecedent to Asian Financial Crisis
2007-2009: Forerunner to the Great Recession
Since the Philippine independence from the US, economic turmoil has shockingly encumbered the year of the pig. Its relations per year differ though. The year of the pig heralded the crises of 1949, 1997 and 2008. The emergence of a crisis (1983) or its culmination (1971) has also shrouded the year of the pig.
The year of the PIG hasn’t been responsible for such gamut of economic dislocations. Or it hasn’t been superstitions that have plagued the Philippine financial and economic sphere since 1946.
These episodes shared some common denominators: credit expansion. Its ramifications were price inflation, economic slump, recession or a financial crisis or a combination thereof.
Some had external influences. Domestic origins were responsible for the others.
Beware the Year of the Pig! Unblemished Record of Economic Turmoil Since 1947! February 3, 2019
So the PIG is connected not just with RAT but also with the OX.
Circling back to volatility, interestingly, in the last four of the five Ox years, statistical inflation has outpaced the GDP.
The annual CPI hit 22.5% in 1985 as the GDP shrunk 6.9%, marking the second straight year of contraction.
In 1973, both the annual CPI and GDP jumped and 15.7% and 8.8%, respectively.
In 2009, the annual CPI was at 4.2% while the GDP was at 1.4%.
So, will this trend be sustained?
II. Year of the OX Favors the USD Peso, Magnified Volatility in the PSE
Volatility in the CPI was also ventilated on the peso.
Foreign exchange returns mostly favored the USD.
The annual average returns on the USD Php have been positive in the last four OX years, but the last 3 years had the juiciest gains, up by 6% at least.
Based on the end of the year performance, only 1997 registered positive but significant gains in favor of the USD.
The big difference between the annual average and end-of–year performance exhibits the degree of fluctuations.
Lastly, volatility was even more pronounced in the returns of the headline index.
The scale of returns of the headline equity index can be described best as spectacular.
1985 registered the least return at 32.13%, while the best was in the year of the Metal Ox in 1961 at 83.11%
On the other hand, the Asian crisis of 1997 also posted an equally intense 41% loss.
So far, resurgent inflation, among the artifacts of the year of the Ox, has reared its ugly head.
III. The PSEi 30’s Secular Bear Market
The economy and stock market operate on long-term cycles. For the economy, the phases are expansion, peak, recession, and trough. Despite all the yelling of recovery, the current recession has yet to culminate.
Figure 2
Cycles are repetition or similarities of outcomes that occur over time as a result of people doing the same things over and over.
Meanwhile, phases of the stock market consists of the bottom/accumulation, advance/mark-up, top/distribution and decline/mark-down, which are subdivided into secular and sub-secular trends.
Furthermore, aside from fundamental factors, psychological shifts fuel phases of the stock market cycle.
Investment guru and philanthropist, Sir John Templeton, described it best:
Bull markets are born on PESSIMISM, grow on SKEPTICISM, mature on OPTIMISM and die on EUPHORIA.”
Let us put the stock market cycle in perspective.
From my standpoint, 2013 represented the real peak of the local index.
Reasons? Record share prices of more than half of the index members shaped the 2013 acme. Aside, the broad-based runup or a bullish breadth occurred on the back of a milestone high in peso trading volume.
Sure, the index raced to a new zenith in January 2018 at 9,058. But in contrast to 2012-2013, only 9-issues shaped it, most of which were derived from end-session pumps, had little support from the broad market and peso-based volume. Peso volume in 2018 was 32% lower than 2013.
Irrespective of the baseline used, the index exhibits a decline/mark-down phase.
Nevertheless, to use the baseline of the consensus, the tipping point of January 2018 shall be our basis.
That said, 2018 marked the climax of the 16-year bull market.
From then, the index transitioned to a declining/ mark-down phase. March 2020’s crash only reinforced it.
NO trend goes in a straight line.
From March 2020 low, a floor was provided by the BSP’s massive liquidity injections, which subsequently, spurred a rally. But this rally represents a counter-cycle within a secular trend.
The speculative mania from the mass influx of retail players piling mostly into small-cap stocks exhibit the denial phase of this fading rally.
Even mainstream media sees it.
From Bloomberg/Financial Post (February 27): Small stocks in the Philippines are thriving amid a surge in demand from retail investors, generating the best returns in Asia’s worst performing equity market this year. All but one of the 10 biggest gainers in the country in 2021 have a market value of less than $171 million. The sole exception, Apollo Global Capital Inc., is worth $1.47 billion — about as much as the smallest of the 30-member Philippine Stock Exchange Index. That benchmark is down more than 4.8% this year.
Figure 3
With diminished economic activity in the face of excess liquidity, the manic bidding on second/third-tier issues by retail participants presently comprise about 30-40% of the 20 most actively traded.
Gnawing at the foundations of this rally are the ramifications of aggregate interventions to supplant the market economy. The pandemic paved way for the enhanced socialization of the domestic marketplace, paving way for an intensified redistribution process, transferring resources from the productive side of the economy towards politically directed consumption, as well as disrupting the economic coordination process.
Just a few examples.
Deficit financed ‘Build, build and build signified the shibboleth of the administration’s economic development model. Public spending hit an all-time of 24% of the GDP in 2020. Public spending represents the direct use of resources of the economy by political authorities at the expense of the private sector. Despite the association of several listed firms with political projects, prices of the benchmark composite index have stalled along with crescendoing command of the resources by the government. Should this crowding out be a wonder?
Likewise, the acceleration of M3 (money supply) did power the index to a fresh high in 2013, but the law of diminishing returns assumed control since. The PSEi barely had sufficient energy to move higher, despite record upon record liquidity injections by the BSP.
While providing a floor, the emergency measures implemented by the BSP in 2020 only sent PER ratio of the index to pre-Asian crisis or 1996 highs! (as presented last week)
Again, the index should put in a proper perspective, though. There have been changes in the composition of index members over time. The PSE/BSP doesn’t state how their published PER figures are arrived at. Also, the massive end-session pumps since 4Q 2014 have skewed the market cap distribution. The top 5 issues control nearly 50% or half of the index.
Nevertheless, a massive megaphone/broadening wedge pattern on the 70-year price chart of the index reinforces the current downside dynamic.
The megaphone pattern still supports a bullish trend as evidenced by its gradually rising support level over time. But this comes in the condition that the support will be reached (2,600-2,700).
The critical support changes to 3,500 should we take the baseline of 2002 as the bottom, nullifying the original megaphone/broadening wedge pattern.
In any event, a capitulation phase, regardless of the level, should ultimately determine the nadir or the final bottom.
We are far from it.
At the onset of my career as a (chart) analyst in 2002, this secular chart was the source for my optimism at a period when investing in the stock market was largely shunned. Because of the prolonged (5-year) downturn, the prevailing bias was depression. Not even cheap valuations could attract new investors, as old players abandoned the markets. Back then, the chart showed that the index could hit 10,000 over time. I preached it.
I hold the opposite view, for now.
IV. Stagflation Ahoy! Philippine Treasury Yields Surge, Widening Spreads, Pointing to Higher CPI and Prospective Tightening!
Figure 4
Businessworld (February 26): Inflation is expected to quicken to as fast as 5.1% in February amid rising fuel and food prices, Philippine central bank Governor Benjamin E. Diokno said on Friday. The Bangko Sentral ng Pilipinas (BSP) expects the consumer price index at 4.3% to 5.1%, beyond its 2-4% target this year and faster than 4.2% in January.
Wow. Like 2020, will the BSP move their goalpost next?
A reliable predictor of the rising CPI has been the widening Philippine Treasury bond spread. Both indicators had their turnaround in 2019, with the 10-year 1-year spread occurring 6-months before the CPI. BVAL 10-year yields spiked by a stunning 60 bps last week, further widening its spread to imply faster street inflation ahead.
Major ASEAN nations likewise posted increases in the yields of 10-year bonds, but Thailand and the Philippines had the most.
Global markets appear to be expecting higher inflation through rising bond yields.
Philippine bonds have outperformed their US Treasury counterpart since 2018, accompanying the strength of the peso. However, this week local securities lagged its US counterpart, which posted an increase of only 6.7 bps.
Has a tipping point been signaled from the market events of the last two weeks?
If it has, how will rising rates impact the credit portfolio and the balance sheets of the banking and financial industry, as well as public debt? How about a shackled economy increasingly dependent on a debt-financed bailout?
By the way, the US House of Representatives passed another round of (USD 1.9 trillion) stimulus, which should compound risks of inflation on a worldwide scale.
Stagflation ahoy!
