DESPITE the fact that market analysis (and economics in general) is much better at predicting the past than it is the future, every pundit and his grandmother has spent the days since the financial market bloodbath on Monday trying to answer the question, “What happens next?” While the answer may not be very encouraging for places like China, the US, or regional neighbors like Malaysia and Indonesia, the outlook for now is perhaps not so worrisome for this country.
“For now” is the key, however; while the Philippines may have emerged from Monday’s disaster relatively unscathed—the Chicago Tribune called the country “a regional star” in the gloom that has otherwise descended on Asia—the longer term prospects might not be so attractive.
When global markets crash as hard as they did this past Monday, the Philippines can scarcely avoid the contagion, and it certainly did not this time, with the PSEi shedding about 6.7 percent and the peso losing 31 centavos against the dollar to close at P46.81.
Contagion works in both directions, however. On Tuesday, when most of the world markets recovered a bit—with a couple of exceptions—so did the Philippines. The local blue-chip index posted a modest 0.58 percent gain, which might have been even more if a technical problem with the exchange’s relatively new trading system hadn’t halted trading for several hours, and the peso pulled back most of its losses from the previous day to close at P46.61.
For all the analysis applied to market fundamentals and trends, actual market activity is, for the most part, driven by shallow reflexes. Apply whichever trite characterization seems appropriate: FOMO (fear of missing out); monkey see, monkey do; shoot first, and ask questions later. There was no more substantial reason for the local market losses on Monday other than the fact that everyone else everywhere else was selling out as fast as they could find buyers – on the off-chance that there really was some underlying economic justification for doing so, local players simply joined the rush.
One day does not a trend make, and if the market results here were simply an instant reaction to extreme movement elsewhere, we would expect to see the local exchanges returning to their “normal” path relatively quickly, which they seem to have done in the two days since Monday’s crash. Unfortunately, that normal path seems to be one that is gradually going downhill, and it is largely the country’s own fundamentals, rather than global economic conditions, that are responsible for it.
Following lower-than-expected GDP growth of 5.0 percent (revised) in the first quarter (as a side note, my own prediction for the second quarter, the data for which will be released later today, Thursday, is 6 percent, give or take three-tenths), exports and manufacturing output have declined. On Tuesday, figures for June imports showed a 22.6 percent increase, reversing a couple of months of declines, but the apparent good news in this is tempered by the fact that it follows a couple of quarters of negative changes in inventories (meaning that companies are simply replacing depleted stocks rather than expanding them), and the fact that it does not yet reflect the impact of the decline of the peso—which tends to work against imports —that began in earnest last month.
With respect to Philippine companies, the International Monetary Fund, while generally giving the Philippines an upbeat assessment, has expressed concerns over the growth of shadow banking in the real estate industry, and high levels of foreign-denominated debt by some larger corporations. With second-quarter earnings disclosures being somewhat less impressive overall than most analysts would like to have seen, there is also growing concern that the local stock market is overvalued. Despite having declined about 13 percent over the past three months—the Chicago Tribune points out this is still better than Thailand, Malaysia, and Indonesia—which is by definition a correction, even after Monday’s steep drop the average price-to-earnings ratio for the 30 blue-chips on the PSEi is 17.76, a number that approaches being too high unless there are clear signs of strong growth.
At this point, there is yet no reason to panic—but there really is not a reason for unbridled optimism, either. With the global economy looking increasingly shaky and with some bedrock components of the local economy looking a little less solid than they did six or eight months ago, alert caution is probably the wisest attitude to take.