Financial markets are facing one of the most disruptive behaviors of global fund managers these days in the form of capital flight in search of better yields, and it is not for no apparent reason, considering that markets are event-driven.
This time, the biggest single event post the 2008 financial crisis awaited by global funds, including those invested in the Philippines, is the impending yield rate increase in the United States come December when the Federal Open Market Committee – the policy-setting body of the Federal Reserve – meets for the much awaited decision.
The Philippine stock market has not been spared from the volatile impact of capital flight as investors respond to the lure posed by higher interest rates elsewhere, in this case the prospect of such in the US. No less than the International Monetary Fund has raised the caveat that a US rate increase is likely to disrupt the flow of capital in Asia, while giving emphasis on asset price volatility.
Even the Philippine Stock Exchange (PSE) president, Mr. Hans Sicat, was compelled to acknowledge the situation. “We have been experiencing net foreign selling in the market in the past weeks, but the numbers show that this has slowed down following the recent meeting of the US Federal Reserve. (Note: This was when the Fed decided to keep its key rates unchanged.) Perhaps it is also an indication of fund managers locking in gains, as the PSEi has delivered double-digit returns since the start of the year.”
It is understandable for Mr. Sicat to issue such reassuring words to calm the nerves of local investors, particularly the small individual investors who have so much to lose and little to gain at this point of extreme volatility in the history of the PSE.
He issued the statement on September 26, one of the most volatile days for the stock market. “The Philippine Stock Exchange Index (PSEi) closed lower by 91.14 points or 1.2 percent to 7,632.46, tracking the overall downturn in emerging markets in the wake of recent indications of a potential rate hike in the US and volatility in the world oil and commodities markets.”
On Friday, October 7, the PSE issued another statement to adjust what was apparently an error reported by the exchange on how much foreigners actually sold on September 26 alone. “The End of Day report on September 26 reflected an initial net foreign selling amount of P16,907,778.32. Following amendments on the foreign flagging of trades on that day, the resulting figure on net foreign transactions on the said date reflects a net foreign buying amount of P4,182,725.27. As a result, the number of successive days of foreign selling is 22 [trading]days for the period August 23 to September 23.”
Even the PSE technology is getting confused over the market’s volatility, perhaps because the people behind its technical operations are shaken by the sheer volume of foreign funds moving out of the market.
Given that the timing of the interest rate increase in the US depends largely on how the world’s largest economy is doing, its labor market is also closely being watched by the Fed.
According to the First Metro Securities Research, investor sentiment toward the Philippine market was risk-off – a euphemism for more sellers trying to get out of the market than buyers betting on a good profit – thus, the PSEi closed the week ending October 7 with a 0.67-percent loss, largely “from uncertainties on both the global and local fronts ahead of the US jobs report release.”
On Friday, the Bureau of Labor Statistics noted that the US generated total employment of 156,000 in September, and the unemployment rate was little changed at 5.0 percent.
This means that the US labor situation is healthy enough for the Fed to finally push the button for an interest rate lift-off in December.
“D” is definitely for market disruption in the run-up to December, and it would be prudent for the Filipino investor to cash in on gains while still ahead, than cut losses when its too late.