On Thursday and Friday last week, the benchmark Philippine Stock Exchange index (PSEi) bounced back from a sharp decline in midweek, picking up 63.07 points on Thursday and another 96.35 on Friday to partly make up for the 194.17 (2.71 percent) loss on Wednesday.
There are probably few analysts in town who would characterize the end of the week rally as a dead cat bounce—local market analysts are, on the whole, incorrigibly optimistic—but that it what it most likely was. In the two weeks ending Wednesday (December 3 to December 17), the PSEi declined from 7,360.75 to 6,966.21, a retraction of 5.36 percent. Last Wednesday’s sub-7,000 close was the lowest the market has been since August.
One of The Manila Times’ favorite analysts, Justino Calaycay at Accord Capital, pointed out some reasons for an optimistic prognosis for the local market: The PSEi is strongly correlated with earnings (a 0.88 correlation), rather than inflation (0.22) or GDP (actually a negative correlation). This suggests that the market is primarily driven by company fundamentals, and as such should not be as strongly affected by outside influences. Indeed, the PSEi is up about 19 percent for this year, outperforming most forecasts for 2014 and certainly outpacing the 1.33 percent yearly gain for 2013.
Yet despite this, the reasons given for recent losses universally point to external forces, having been variously blamed on falling oil prices, the Russian currency crisis, a typhoon, foreign investors pulling their money out of the market, weakening emerging market currencies, economic signals from China and jitters caused by losses on Wall Street.
None of those reasons actually make any sense. Except for a few
limited circumstances—for example, the direct impact on oil company revenues or fuel hedging losses incurred by airlines—lower oil prices are nothing but a benefit to the Philippine economy. The Philippine economy has very little connection in terms of trade, currency exchange, or debt with Russia’s, and whatever impact the growing Russian crisis has will be minimal at worst. Typhoon Ruby was mild in comparison to the impact of other storms the country has suffered in recent years, and even earlier this year; Typhoon Glenda in August caused a greater amount of damage over a much wider area, including Metro Manila. The effect of “hot money” leaving the market is at best overestimated; according to the Philippine Stock Exchange’s own research, the biggest concentration of foreign investment value in the local market occurred more than a year ago, in August 2013 (significantly, a couple months after the beginning of the tapering of the US Fed’s quantitative easing program), and was still less than 50 percent even at that point.
Also, the weakness in emerging market currencies, which has largely been the result of a strong dollar rather than emerging market economic conditions, has not been particularly severe or as sustained as many feared it would be, and appears to have at least leveled off if not yet started on a definite strengthening. Signs of slowing in China’s economy do hit a little closer to home, but their effect on share prices here should be retrospective, according to the “earnings-driven market” assumption.
Taken all together, the various factors—a market supposedly being driven by local corporate strength but frequently having disappointing daily results explained away as a consequence of “lacking local leads,” a market that has been unable to gain more than a mild, short-lived boost from legitimately positive economic indicators like lower inflation and lower unemployment, and a market which has been rather volatile and set deceased felines to bouncing with some frequency—point to what is, possibly, a waning of fundamental confidence in the market.
And that in turn points to a waning of fundamental confidence in Philippine businesses; expectations now seem to be that 2015 will be worse than 2014, and in stock markets, those kinds of expectations can easily turn out to be self-fulfilling prophesies.
The real question, is how much of an impact will a stock market retreating to the 6,000 to 6,500-point level instead of advancing to 7,500 or 7,700 points actually have on the wider economy? That depends on how much waning confidence is eventually reflected in consumer activity, but that it would have a significant effect is a difficult argument to successfully make.