To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble—Ray Dalio
In this issue:
PSEi 30 6,600: Global Carry Trade and the SONA Pump? 3Q Vulnerability, The Impact of SONA on the PSEi 30
I. A Week of Pumps and Pre-closing Dumps!
II. Global Financial Easing Have Fueled Cross-Border Flows or Carry Trades; PSE Supported by Foreign Flows
III. PSEi 30: The Property Sector Powered Another Low-Volume Rebound
IV. Financial Melt-up, Market Dislocations, and Mounting Concentration and Market Risks
V. Seasonal Vulnerability: Bears have Ruled September and the 3Q Outcomes
VI. Trivia: The Impact of SONA on the PSEi 30
PSEi 30 6,600: Global Carry Trade and the SONA Pump? 3Q Vulnerability, The Impact of SONA on the PSEi 30
The Philippine PSEi 30's comeback eked a weekly gain on thin volume. Cross-border flows from global financial easing played a role. Sectoral rotation signified the other factor.
I. A Week of Pumps and Pre-closing Dumps!
After an early pullback, the PSEi rebounded to close the week up .34%, a second straight week of advance, which lifted year-to-date returns to 1.24%. However, this gain lacked vigor, evidenced by listless volume and weak market breadth.
Nonetheless, it was a pre-SONA week with intriguing developments.
Figure 1
For starters, pumps and pre-closing dumps signified the defining character of four of the five trading sessions. Pre-closing dumps accounted for about 142.6 points or a whopping 2.15% from the other week's close! (Figure 1, topmost chart) Incredible.
Like clockwork, the headline index would climb during post-lunch recess, which I call the "afternoon delight," but much of the late gains would be offset by furious pre-closing dumps.
Given the substantial structural distortions in the % weight distribution, some market participants have used this to "manage" the PSEi 30 index level.
Again, the top 5 issues commanded an accumulated weight of 47.2%, and the top 10, a 68.8% share of the PSEi 30, as of July 21.
Further, the cumulative share of the main board volume of the previous top 6 issues (SM, SMPH, BDO, ALI, AC & JGS) continues to climb, exhibiting the increasing concentration of trading activities towards the heavyweights. The increased volume has also supported their share weight of the PSEi free float cap. (Figure 1, middle and lower windows)
Additionally, the top 10 brokers, mostly institutional brokers, have corralled the trading activities, which averaged 54.85% this week.
So, pumps and dumps remain a highlight of the "stock market with Philippine characteristics."
II. Global Financial Easing Have Fueled Cross-Border Flows or Carry Trades; PSE Supported by Foreign Flows
Figure 2
The easing of credit conditions in emerging markets, which indicates likely forthcoming central bank rate cuts, has accelerated ahead of their developed market peers. (Figure 2, topmost graph)
This financial easing has emerged as the global inflation cycle culminates, fueling leveraged cross-border arbitrages such as "carry trades." (Figure 2, second to the highest window)
The disparity in the weekly performance of Asian-Pacific stocks could be a symptom of this unfolding dynamic.
South Asian benchmarks unanimously ascended, with an average return of 1.99%. All ASEAN bellwethers closed up with an average of .53%. The national indices of Vietnam +1.5%, Laos +1.21%, and Singapore +.91% led the region's winners. (Figure 2, second to the lowest diagram)
On the other hand, the bourses of developed economies of East Asia and the Pacific mostly endured losses.
Foreign trade was instrumental in propping up the domestic benchmark. Fund inflows reported Php 981 billion, a decrease from Php 2.6 billion a week ago.
Due to special block sales, the share of foreign flows to the total turnover fell to 39.5% from 56.3% over the same period. (Figure 3, lowest window)
Here is the thing, the increased foreign participation, notwithstanding, underscores the susceptibility of the PSE to volatility from sudden outflows due to the low volume.
III. PSEi 30: The Property Sector Powered Another Low-Volume Rebound
Figure 3
The key beneficiary of this week's midweek rally was the property sector (+2.53%), supported at the flanks with gains of the services (+.83%) and the continuing melt-up in financials (+.44%). (Figure 3, topmost window)
The free float market cap of financials accelerated its "blow-off phase" as the property sector staged a weekly bounce.
In any event, the bounce of the property sector comes in the wake of grotesque divergence with financials. Of course, the irony of this relationship is that the bank's biggest client is the real estate sector.
And while the bounce suggests that the financial conditions will improve due to falling rates, the property/PSEi 30 ratio exhibits the deterioration of the sector's performance since 2019, regardless of the direction of official interest rates. (Figure 3 lowest chart)
The thing is, market internals remain frail and susceptible to excess downside volatility.
IV. Financial Melt-up, Market Dislocations, and Mounting Concentration and Market Risks
Figure 4
Despite the participation of foreign money, volume remained depressed. Mainboard daily turnover (averaged weekly) slipped 8.7% to PHp 3.55 billion from Php 3.89 billion a week ago. The mainboard turnover remains adrift at 2017 lows. (Figure 4, topmost chart)
Back to the divergence between the financial sector and the PSE 30, on a 6-month basis, the "blowoff" phase of the financial sector—its index fast approaching the 2017 all-time high—has been synchronized with the momentous or record buildup of the sector's peso turnover. (Figure 4, middle window)
Once again, this punctuates the increasing concentration of trading activities toward select banking issues in the face of an enervated general turnover.
In contrast, the erosion of volume has led to a downtrend in the property index. (Figure 4, lowest graph)
In a nutshell, the seemingly engineered melt-up in the financial sector represents a market dislocation that has only increased concentration and market risks.
V. Seasonal Vulnerability: Bears have Ruled September and the 3Q Outcomes
Finally, let us deal next with seasonal performance.
To be sure, today's conditions are different from the past. But in the context of leverage, inflation, and interest rates, current financial health must be worse than the antecedents.
Figure 5
The third quarter tends to be unfavorable to domestic equity markets. Though the average returns from 2008 have been a positive 1.22%, mainly due to outstanding gains of 2009 (14.9%) and 2010 (21.6%), diminishing returns have afflicted the seasonal performance of the PSEi 30 in the 3Q. (Figure 5, upper window)
If seen from the start of 1st wave of the inflation cycle in 2015, the nominal PSEi 30 returns submerged to 2.5%, with 5 of 6 3Qs in the red.
That’s because September sticks out as the most vulnerable month. (Figure 5, lower pane)
From 2008, the returns have averaged -1.08%. Adjusted from a base of 2015, this magnifies the MoM deficit to -2.99%. And from 2015, the biggest recorded MoM plunge was last year and 2018, with 12.8% and 7.4%, respectively. In essence, significant September activities materially influence the annual returns.
Of course, this could provide profitable short-term trading windows. One can sell before September or take a position once a selloff materializes.
The takeaway, the PSEi 30 remain susceptible to amplified downside volatility considering the decaying volume trend.
VI. Trivia: The Impact of SONA on the PSEi 30
Will Monday's State of the Nation’s Address (SONA) by the incumbent President buoy the domestic stock market?
Will the surge in the PSEi 30 be used to justify to the public the enactment of the Philippine version of the Sovereign Wealth Fund (SWF), the Marharlika Investment Fund?
This week, the leadership legislated the Maharlika Investment Fund (MIF).
We should see in the SONA if the leadership rationalizes the Sovereign Wealth Fund (SWF), the MIF, with the latest performance of the financial markets.
Adding to the MIF, the SONA will likely include the announcement via Proclamation No. 297, the emancipation from the pandemic's authoritarian and discriminatory restrictions.
Further, the leadership will likely elaborate on the declining inflation rate to signify acts of their political triumph.
In any case, how does the PSEi 30 perform before and during the SONAs?
Figure 6
1. Bulls have dominated the PSEi 30 covering the week before the SONA, where the average return since 2007 has been +.62%, bolstered by increases in 11 of 17 episodes—including 2023. (Figure 6, topmost chart)
2. Bears were in control of the trading day of the SONA, capturing 11 of 16 sessions since 2007. The average rate of change was -.41% through 2022. (Figure 6, middle graph)
3. Lastly, bulls retained the slight edge covering weekly returns of the SONA. Though bulls prevailed in 10 of the 16 events since 2007, the average return was a paltry .15% through 2022. (Figure 6, lowest diagram)
Of course, past performance is no guarantee of future outcomes.
Data from the SONA signify mainly noise than signals when assessing the periodical performance (monthly, quarterly & annual).
If anything, the previous and the coming SONA look more like political vaudeville.
