Benel Lagua l March 8, 2024 l The Manila Times
THE Economist recently reported the following: “Everywhere you look, stock markets are breaking records. American equities, as measured by the S&P 500 index, hit their first all-time high in more than two years in January. Europe’s STOXX 600 set its own records. Japan’s Nikkei 225 had surpassed its previous best, set in 1989. A widely watched global stock market index recently hit an all-time high.”
In the Philippines, the PSEi (Philippine Stock Exchange) has been hovering at 6,900 mark, trying to break the 7,000 level in the near term. Profit taking, however, has hindered the approach and near-term forecasts are sideways movement within the 6,800–6,950 levels. In mid-2023, some experts forecasted a year-end range of 7,300 to 7,500, which never happened.
A review of PSEi performance showed that the PSEi closed at one of its highest at 9,058 in January 2018, a record territory in sync with the US market. During the pandemic years, specifically in 2020, the PSEi went down to as low as 4,623 but recovered to 7,139 by end of that year. Following are the year-end PSE index performances: 2021 – 7,122, 2022 – 6,566, and 2023 – 6,450. By end of January 2024, it was 6,466, and on Feb. 29, 2024, it was 6,876.
In short, while in 2018 we were able to track the performance of the American market, these days we are left behind in the global stock market bull run. The key question is whether we can join in the party.
The same The Economist article notes that almost 60 percent of Americans now report owning stocks. This level of activity could have helped boost the surge, although, understandably, most are concerned if the stock market bonanza is sustainable. Most academics and market researchers are observing that it will be tough for American firms to deliver the long-term growth needed to reproduce the extraordinary recent returns. The belief is that valuations in the US are rather high, with the cyclically adjusted price-to-earnings ratio or CAPE, now standing at 34.3, a number which hit a peak of 44.2 during the dotcom bubble.
But before we even concern ourselves with what is happening elsewhere, let’s focus on our domestic stock market. Could we, at least, expect a moderate surge to reward local equity investors? Is attaining even a modest 7,500+ PSEI level within reach?
For this to happen, Philippine companies listed in the stock market need to start showing significant profit growth. The forecast for growth in the economy is encouraging enough but will it translate to better corporate profits? And is the structure of our bourse attractive enough to encourage local savers to participate. The tentative answer does not look optimistic.
The Philippine Institute of Development Studies released a paper entitled “Macroeconomic Outlook of the Philippines in 2023-2024: Prospects and Perils,” which reported that “for 2024, growth is anticipated to register between 5.5 to 6 percent, while inflation is expected to fall to the center of the target band (at around 3 percent). These projections consider the steady stream of income from abroad, an improved jobs picture, benign financial conditions, a less restrictive public budget, and a possible resurgence and/or rising business expectations in some sectors. One draws attention to risks related to inflation, the country’s fiscal position, and the newly created national investment fund.” The paper reiterated previous concerns on controlling inflation without harming growth, managing exchange rate volatility, rebuilding fiscal space, and investing in infrastructure and human capital.
Inflation will be affected further by forecast of a “meteorological drought” condition in April and May. The proposed P100 wage increase may be a big burden to SMEs (small and medium enterprises) in the survival mode. The charter change issue, while apparently aimed at lifting equity restrictions on critical economic sectors, is vulnerable to political machinations.
No less than Socioeconomic Planning Secretary Arsenio Balisacan notes, there are other problems confronting the country such as “energy costs, inadequate connectivity infrastructure, slow bureaucratic processes, inconsistent local and national regulations, and highly concerning poverty and malnutrition.” There are too many variables that can provide a counterweight to good corporate growth.
On the market front, one of the key lessons of finance in advance economies is the concept of an efficient capital market. This simply means that security prices accurately reflect available information and respond rapidly to new information as soon as it becomes available. For this reason, one can “trust market prices.”
Underlying the efficient market hypothesis (EMH) is competition and information readily made available to the public. Can we truly say no party or group of people is able to secure corporate information before everybody else gets it? Unless we can honestly trust market prices, there will be continuing skepticism, and it will be hard to increase the proportion of population support in stock market investing. Under the strong form of EMH, which refers to trading on insider information, violators are apprehended and even jailed. In the Philippines, has anyone been jailed for insider trading? The jaundiced view is they even get richer.
It is a sad commentary to our financial market that we are unable to keep pace with the strong growth happening elsewhere. While pundits are questioning the sustainability of the surge, it is nonetheless a run we are unfortunately missing. And it is a boost we need to harness more interest in the domestic stock market.
*** Benel dela Paz Lagua was previously executive vice president and chief development officer at the Development Bank of the Philippines. He is an active Finex member and an advocate of risk-based lending for SMEs. Today, he is the independent director of progressive banks and some NGOs. The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as Finex. Photo from Pinterest.