PH stocks fall in global rout

BLOODBATH ON STOCK MARKET Red dominated the electronic board on the trading floor of the Philippine Stock Exchange in Makati City as the stock market plunged 6.40 percent by midday Monday, pulled down by concerns on the Chinese economy and the slump in commodity prices. The local stock market is now down 17 percent from its peak earlier this year. AFP

The Philippine stock market wiped out P764.44 billion of its market value following a record free-fall while the peso slipped to a five-year low against the US dollar on Monday.

The massive declines came amid a global financial market meltdown triggered by concerns on the Chinese economy and the slump in commodity prices.

The paper loss on the stock market was equivalent to around 6 percent of the country’s nominal gross domestic product, the total value of goods produced and services rendered, in 2014.

The Philippine Stock Exchange index (PSEi) fell 487.97 points—the largest decline in a single day in absolute terms—to close at 6,791.01. This reversed the PSEi’s remaining gains, resulting in a year-to-date loss of 6 percent.

The amount of market value lost during Monday’s stock market rout was more than the entire market capitalization of some of the country’s most valuable companies, like tycoon Henry Sy’s SM Investments Corp. (P720 billion) which owns the largest property, banking and retailing businesses in this side of the world or telecommunications giant Philippine Long Distance Telephone Co. (P594 billion).

At the same time, the peso depreciated to its lowest point since President Aquino came to power at 46.815 to $1, losing 31.5 centavos from last week’s close of 46.50 to $1.

But local monetary authorities said intervention in the foreign exchange market would be kept to a minimum to allow the currency to move in line with the region.

Yuan devaluation

In a press briefing, PSE president Hans Sicat said this heightened volatility started with the surprise devaluation of the Chinese yuan two weeks ago alongside the slump in commodity prices, particularly base commodities and oil.

Because local financial markets were closed on Friday, a nonworking holiday in observance of Ninoy Aquino Day, Sicat said pent-up pressures added to Monday’s sell-off.

“What’s happening in the Philippines is consistent with pressures across emerging markets,” he said.

In terms of percentage decline, the local stock market had seen worst single-day drops in previous years. The PSEi saw a similar pace of decline–442.57 points, or 6.75 percent–on June 13, 2013, during the first episode of the “taper tantrum” when the US Federal Reserve first hinted at the tapering of its aggressive monetary stimulus.

On Oct. 27, 2008, or at the height of the US-epicentered global financial crisis, the PSEi lost 12.27 percent in a single day.

Disconnect

But Sicat said there was “a little bit of disconnect” between the market decline and the strong Philippine macroeconomic fundamentals, which he noted had greatly improved since the global financial crisis.

In recent years, the Philippines has achieved a higher growth trajectory in a low inflation rate environment with its total foreign exchange reserves exceeding foreign debt while its government had achieved investment grade rating for the first time.

Bear territory

The stock market has now pulled back by around 17 percent from the all-time high closing of 8,127.48 seen in earlier months but, according to Sicat, it is too early to say whether the local stock market would fall into bear territory.

When a stock market falls by 20 percent from its peak, some investors deem this as technically entering the bear market.

Sicat acknowledged that the sharp decline would be a negative factor as far as capital market activities were concerned. “Issuers may be hesitant to pull the trigger,” he said.

But while domestic economic fundamentals have changed a lot for the better since 2008, economies today are more intertwined and multiple asset classes in various geographies easily get infected, Sicat noted.

“We’re a small economy in the overall scheme of things whereas China is the largest. So, clearly it has a global effect,” he said.

Loss of confidence

The local stock barometer is deemed an advance gauge of the domestic economy. A sustained period of falling stock prices indicates a loss of overall confidence. When investor sentiment is weak, investors in turn spend less for job- and income-creating expansion activities.

Michaelangelo Oyson, president of BPI Securities, said looking back at the situation during the US Fed taper tantrum in 2013, the market’s next support level would be at around 6,400.

Cheering weak peso

Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. said the central bank would “carefully provide liquidity in the market should the exchange rate volatilities become excessive” but saw no need for any aggressive intervention.

The BSP maintains a flexible policy for the peso, but reserves the right to intervene occasionally to keep spikes in check.

Tetangco said excessive volatility in the peso’s value could be disruptive to business planning, in the short term, and may also “disanchor” inflation expectations.

“So far, the peso volatility has remained within the middle of the range of the volatilities of regional currencies and inflation expectations are still well-anchored,” Tetangco said.

Beneficial to OFWs

The peso’s recent weakness is seen beneficial to some sectors of the economy, particularly overseas Filipino worker (OFW) households and exporters who earn foreign exchange as this will greatly boost the peso equivalent of their foreign exchange earnings.

Foreign exchange movements raise issues for small economies like the Philippines, which on one hand earn money from overseas through remittances and exports, and buy vital commodities like food and fuel from other countries.

Imported goods and foreign debt payments become more expensive when the peso declines. However, exporters and families receiving remittances from overseas workers earn more money in peso terms for every dollar they receive.

Local economists said given its current position, the Philippine economy has much to gain as its currency weakens.

“My estimate is that about 75 percent of the economy will benefit from a weaker peso,” University of Asia and the Pacific economist Victor Abola said in an interview.

On Monday, peso reached a low of 46.845: $1 and a high of 46.65: $1 after opening at 46.70: $1 on Monday. Volume was thin at $572.50 million from last Thursday’s $699.70 million in trades.

BPO workers

Abola said about 15 million people rely on remittances from OFWs. Dollar-earning business process outsourcing (BPO) companies directly employ about one million people, while at least four times as many people work in industries that thrive due to outsourcing.

“The depreciation of the currency is positive, as long as it’s not too sharp that it becomes disruptive,” Abola said. The peso has declined by about 2 percent since July—relatively stable against other currencies in the region.

Local firms that compete with multinationals would be able to better compete.

“When the peso becomes more competitive, it also boosts the performance of local, non-exporting companies because it eases competition from imported alternatives,” Bank of the Philippine Islands economist Emilio Neri Jr. said on Monday.

As the cost of imported goods goes up, local products become more affordable to Filipino consumers. “The stronger the peso, the more we flood the local market with imported products that would have otherwise generated profit and jobs to a lot of Filipinos,” he said.

Low inflation also gives policymakers the space to allow the peso to depreciate. In July, consumer prices rose by an average of 0.8 percent relative to year-ago levels, the slowest pace on record. This lowers the risk of breaching inflation targets set by the government, even if the cost of imported goods climbs.

The weaker peso would also help improve government revenue collections, offsetting the higher cost of paying for dollar-denominated state debt.

“Remember that customs receipts and (sales taxes) improve when the peso is weak. If the economy’s growth accelerated, Bureau of Internal Revenue’s [collections] also improve,” Neri said.

He also credited the government’s fiscal authorities for veering away from borrowing heavily from overseas in the past five years—a decision that insulates the economy from the negative effects of a weaker currency.

“I don’t think the Aquino administration would have been able to successfully fund [projects] if the national government had not changed its borrowing tack,” Neri said.

Risk aversion

Siddharth Mathur, an economist at Citigroup, said risk aversion was spreading, now via the equity markets.

“Falling commodity prices have been sending an alarming message about global final demand for several months already, and have now perhaps fallen far enough to trigger a shift in the market’s sanguine growth outlook. The inability of Chinese policymakers to engineer a bounce in growth, together with large currency devaluations across the world and uncertainty around the Fed’s policy normalization path have all contributed to the market’s nervousness ahead of this week’s meeting of global policymakers at Jackson Hole,” Mathur said.

If this sell-off damages the consensus view that the US Fed will start raising interest rates this year, Mathur said the US dollar could underperform in this environment, with the euro and Japanese yen likely to be the main beneficiaries.

“Emerging markets were already suffering from growth underperformance, and so are unlikely to be able to withstand this turn in global risk appetite. Even though positioning in Asian FX (foreign exchange) markets is modest by historical standards—and in some instances is already at extreme short—we expect the currency markets will continue to bear the brunt of this sell-off,” Mathur said.

Policy intervention, which in Asia has traditionally been the main volatility absorber, may be less reliable this time, the economist said. With inflation low, commodity prices falling and output gaps widening, he said Asian policymakers would be under no pressure to lean against currency depreciation at this time.

“But as the global sell-off is still young, it is possible that investors look to any similar puts in other markets as offering an opportunity to further reduce their exposure. We believe it is still too early to expect bargain-hunting,” he said.

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