Reality check on stock trading

While the public’s attention was drawn in recent weeks to the pork barrel scam, two significant developments in our economy almost passed unnoticed.

The stock market sank to its lowest level since it rose to its highest last May. All the gains it earned during that month and after were wiped out last week.

Some stockbrokers expressed apprehension that the slump may still worsen in the coming days.

While the stock market was in a gloomy mood, a different atmosphere spread through the National Economic and Development Authority. The country’s premier economic planning office announced that our gross domestic product in the second quarter grew by 7.5 percent.

Although the growth fell short of Neda’s expectations, there was reason to be happy considering that the world’s major economies continue to suffer from serious financial problems.

Neda chief Arsenio Balisacan attributes this favorable development to the country’s strong economic fundamentals. He said our foreign exchange reserves can support 12 months of imports and that our inflation rate is at the low end of the targeted range.

Something doesn’t seem right with the way things went differently with these two interrelated events.

Variance

Under normal circumstances, when the economy is on an upswing, the stock market (which stockbrokers claim to be the barometer of the country’s financial health) should also be on the same ride.

The textbook theory is, when the economy is in good shape, people with disposable income will, after meeting their basic needs and fulfilling some of their amenities, invest in stocks.

If the investor is the conservative type, he looks to stocks as a source of extra money by way of dividends; if his intention is to earn from the appreciation of their value, his game plan is to sell them when they reach a certain price level that assures him of some profit.

It will be recalled that, during the months that preceded the all-time high of the stock market in May, the stock analysts and their comrade in arms, the stockbrokers, touted the country’s healthy economic condition as the principal reason behind the spike in stock trading.

They said the investors, in particular, foreign funds, were gung-ho over the way the Aquino administration was running the country. The foreign capital entry was described as a vote of confidence on the President’s governance.

The hype worked. Attracted by supposedly high returns on stock investment, a lot of people who otherwise would be wary about buying stocks joined the buying frenzy.

Transient

As more foreign money came in, the stock prices underwent price swings depending on the developments in the local scene and the performance of other stock markets in the region.

Like their counterpart in other capital markets, these foreign investors buy and sell stocks with only one objective—to make money, lots of it. They bought stocks when prices were down and unloaded them when they felt they could already make a buck and more.

There is nothing wrong with this strategy. Their principal responsibility to their own stockholders is to look for the best returns possible and at the shortest time for their investments.

Their involvement in the stock marker has no long term perspective. It is not aimed at creating jobs for Filipinos or putting up facilities that can contribute to the country’s growth and development. Corporate social responsibility is hardly a factor in their business plans.

The foreign funds leave at the first sign of trouble or when they have made enough profits at the expense of other investors who failed to pull out before the roof fell.

The only people who benefited from their transitional stock market participation are the stockbrokers who earned commissions from the transactions.

New line

If, as earlier claimed by stock market propagandists, that the all-time spike in stock trading was attributable to the country’s sound economic policies, what should we make then of the recent depression in stock trading?

Did the foreign investors pull out because they have lost faith in the administration’s capability to competently steer our economy? Should the sellout be interpreted to mean that the country’s economic fundamentals cannot be trusted to sustain growth and development?

If that “logical” approach is taken, then Neda should be called to the carpet for claiming that the 7.5 percent GDP growth is a product of the country’s strong economic fundamentals.

Well, it looks like the stock market is now singing a different tune. Aware that contradicting Neda’s assessment would be politically incorrect and could put its bigwigs on the wrong side of the administration, it has shifted gears.

The trading slump is being “blamed” on recent events in the United States capital market. Without going into details, the Federal Reserve has taken steps to make investments in the US more attractive or profitable.

It is not surprising therefore that the foreign investors who once used the local bourse as temporary financial playground have pulled their stakes and made an exodus to the US to make more money.

Unless something similar to the 2008 US housing mortgage meltdown happens, the local bourse would have to learn to subsist without foreign funds that make a living from exploiting weaknesses in the capital market of developed and developing countries.

If it is any consolation, not all local investors were caught napping during the reversal of fortunes in the stock market.

The institutional investors who knew the foreign funds’ game plan and could read the tea leaves in the international capital market were able to get out before the stock market took a dive.

As in similar situations in the past, the small stockholders—those who were not privy to vital inside information about the capital market—found themselves holding the proverbial empty bag. (For comments, please send your email to [email protected].)