Why is the PH stock market down?

The Philippine Stock Exchange Index (PSEi) ended January on a very weak note, down by 7.9 percent in a span of just one month.

This, despite the Philippines’ brighter economic outlook for 2020: benign inflation, the timely passage of the government’s budget, the falling risk of a global economic recession and stocks’ attractive valuation.

Nevertheless, there are also several factors pulling the stock market down. These include the following:

Taal Volcano eruption: Last Jan. 12, the Taal Volcano erupted, belching ash that reached as far as Manila and parts of Central Luzon.

More concerning though is the uncertainty over how violent the eruption could be or how long it could last. If history were to repeat itself, Taal could remain active for several months. Note that in 1754, Taal’s unrest lasted from May 15 to Dec. 1, or almost seven months.

Taal’s eruption is expected to negatively affect the country’s tourism and agricultural sectors. In fact, inflation could go up because of supply disruptions. The longer the eruption lasts, the larger the impact on the economy as tourists continue to avoid Tagaytay while farmers cannot plant.

If Taal’s eruption becomes violent, it could also hurt some manufacturers located near the area. Luzon could also suffer from brownouts as 30 percent of the island’s power generating capacity is located in Batangas.

Worsening 2019 novel coronavirus (2019-nCoV) outbreak: Although the first case of the coronavirus was identified in December last year, global markets only started reacting last week after the number of infections and deaths increased exponentially in a growing number of countries around the world. The World Health Organization already declared a global health emergency last Friday.

Compared to 2003, when the severe acute respiratory syndrome (SARS) outbreak took place, the spread of the new virus is much faster. More than 11,000 people are now infected globally since it was first identified in December.

The new coronavirus is spreading much faster as Chinese domestic and international travel have increased significantly from only 16.6 million trips in 2003 to 149.7 million in 2018 based on government estimates.

This recent outbreak is expected to hurt the tourism sector the most as people avoid traveling to reduce the risk of catching the virus.

The Philippines is also expected to be more vulnerable to the 2019-nCoV as there are now significantly more Chinese tourists coming to the country. By the end of October in 2019, there were 1.5 million Chinese tourists accounting for 22 percent of all inbound tourists.

Water concession issue remains unresolved: Last December, the Philippine government decided to revoke the extension of Manila Water and Maynilad’s water concessions from 2022 to 2037.

The President also threatened to sue the water firms for economic sabotage, and to nationalize the water concessions if the water firms do not accept a new contract. Until a new contract that is favorable to both is drafted, concerns that the government can change regulations anytime to fit its need is causing many investors to stay away.

Irrelevance of the Philippines in the emerging market basket: The Philippine stock market’s weight in the MSCI emerging market index is only less than 1 percent. Given the Philippines’ small size, foreign investors are deciding to just stay away until most of the risks are resolved.

For the month of January, foreign investors remained net sellers in the stock market to the tune of P8.4 billion. The impact of their selling activity is significant as they account for more than 50 percent of the Philippine market’s value turnover.

Weak global market: After performing strongly the past few weeks, global markets are now suffering from a correction, largely due to concerns of how the novel coronavirus outbreak would hurt economic growth. Unfortunately, the weak performance of global markets is also hurting the performance of the local bourse even though we never participated in the rally that took place earlier on.

There is a silver lining though, as most of the risks hurting the performance of the Philippine stock market are only temporary. Note that the Taal Volcano alert level was downgraded to 3 from 4, meaning there is a smaller chance that a hazardous eruption would take place.

Although it took around eight months to resolve the SARS outbreak in 2003, there is a chance that the new coronavirus outbreak will be stemmed quicker as China and the rest of the world are responding faster to address the pandemic.

We also believe the water concession issue will eventually be resolved. After all, Justice Secretary Menardo Guevarra recently said the government doesn’t want to kill the water concessionaires and that the case will be resolved in the next six months.

That said, although the Philippine stock market could continue to go down in the short term, we don’t expect it to stay down for a very long time as we expect the risks facing the country to be resolved in less than a year. This should create an opportunity for investors to buy cheaply, allowing them to book substantial gains going forward. INQ