If the peso is strong, why are PH stocks weak?

The Philippine peso is proudly one of a handful of Asian currencies that has appreciated against the US dollar this year. Why then is our stock market among the weakest in the region?

Year to date, the Philippine Stock Exchange Index is down 22 percent, making us the worst performing index in local currency terms. Liquidity has also dwindled, with average daily value turnover falling to only about $100 million.

To be fair though, we are not alone as most Asian markets are down sharply in the same period, including Vietnam, Australia, Hongkong, India, Thailand, Singapore and Indonesia. This is not surprising given the negative impact of COVID-19 on all economies and corporate earnings growth.

However, there are Asian markets that are performing well, such as China, Korea, Taiwan, New Zealand, Malaysia and Japan. What factors are setting these markets apart?

The main reason for the said markets’ strong performance is their large exposure to industries that either benefit from or are resilient to the COVID-19 pandemic.

For example, the Chinese indices, Shenzhen Stock Exchange Composite Index and Shanghai Stock Exchange Composite Index are up by 25.3 percent and 5.4 percent, respectively, year to date. Aside from China reopening its economy ahead of everyone else, the two indices have more than a thousand members each and have exposures to bio-medical equipment manufacturers, pharmaceutical companies, and new economy stocks such as high-tech electronics and electric vehicle battery manufacturers.

Meanwhile, Korea’s KOSDAQ index is up 16.9 percent so far this year, thanks to its heavy exposure to pharmaceutical companies, while Taiwan’s Taiwan Stock Exchange Weighed Index is higher by 1.5 percent due to the heavy weighting of high-tech electronics manufacturers like Taiwan Semiconductor Manufacturing Company.

Although New Zealand, Japan and Malaysia are not as strong, their markets are relatively resilient as all three countries have a handful of large companies that belong to tech, health-care or pharmaceuticals sectors like Fisher & Paykel Healthcare, Softbank and Top Glove.

In contrast, the Philippines’ PSEi index is heavily exposed to financial, real estate and consumer sectors or companies engaged in traditional businesses. This is evident in the five largest locally listed stocks namely, SM, SM Prime, Ayala Land, BDO and Ayala Corp. The other poorly performing equity markets in Asia which were mentioned earlier are also heavily exposed to financial, real estate, and consumer sectors.

Aside from the Chinese stock market’s heavy exposure to beneficiaries of the COVID-19 pandemic and new economy plays, its stronger performance compared to all other Asian equity markets is due to the Chinese government’s $1.4-trillion five-year tech investment program which is meant to stimulate the economy and make China a global leader in technology. Support from this program including subsidies have greatly benefited companies engaged in software development, IT security, artificial intelligence, 5G and advanced electronics manufacturing companies, among others. Government support is helping these companies grow faster, making them even more attractive to stock market investors.

The Chinese stock market is also benefiting from freshly rolled out capital market reforms. For example, earlier this year, the government took steps to make it easier for companies to list in the stock market, encouraging more tech companies to raise funds by going public. The government also increased the daily price limits for stocks. It is considering the possibility of allowing same-day settlement. These reforms are beneficial for the stock market by encouraging more trading, increasing market liquidity.

While the Philippines has taken the right steps in ensuring the stability of the peso even during times of crisis, we can also take steps to make our local stock market more resilient against future crises.

Like China, we can pass reforms that will make it easier for companies to list in the Philippine Stock Exchange. For example, if we want to have more home-grown tech companies in our bourse, we can relax rules requiring companies to be profitable for at least three years before they can list. Note that it takes a long time for tech companies to become profitable. Even G-Cash which now has millions of users continues to be in the red. These tech companies also need a lot of capital to survive but they usually cannot borrow money from banks and not all of them are owned by big companies or rich individuals (like Globe for G-Cash).

By making it easier for companies to list, we should eventually have more new economy stocks that are part of the Philippine stock market, giving investors more choices of stocks to buy during difficult times.

We should also educate companies regarding the benefits of being a publicly listed company so that they will be encouraged to list. Aside from allowing them to access public funds, being listed raises their company’s profile, helping them hire and retain highly skilled talents which is crucial for future growth. Being listed also allows the owners of a company to unlock the value of some of their shares which is not possible for private companies.

Finally, it is important to educate the public. Having more listed companies is like a double-edged sword. Although it will boost market liquidity, it will also increase the likelihood of investors losing money from investing in companies that eventually fail. Nevertheless, teaching investors how to properly pick stocks and control risks should help minimize potential losses. INQ