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Stock market surprises in 2020

/ 04:02 AM December 21, 2020

The year 2020 is exciting to say the least, with a lot of surprises disrupting everyone’s personal and business plans. Here are some of those surprises that significantly affected the performance of the Philippine stock market:

The COVID-19 pandemic. While there have been several fatal new diseases in the 21st century such as SARS (severe acute respiratory syndrome), MERS (Middle East respiratory syndrome), and Ebola, none have spread as quickly and as widely as the coronavirus, causing the number of infections to hit 75,588,791 and fatalities to reach 1,672,827 as of this writing. To control the spread of the virus, governments around the world imposed strict lockdowns resulting in massive disruptions in the global economy. In the Philippines, quarantine measures were responsible for the significant jump in the unemployment rate, which reached a peak of 17.7 percent in April, and the record drop of 16.9 percent in GDP in the second quarter of the year.

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Record low interest rates. Historically, economic crises have always been accompanied by soaring interest rates as funds flow out of riskier assets including emerging market stocks and bonds into traditional safe haven instruments such as US treasuries and gold. During this pandemic-induced crisis though, interest rates are at record lows as central banks around the world, led by the US Fed, aggressively loosened their monetary policies by cutting rates and buying back bonds to stimulate the global economy. Note that the US 10-year bond rate is now only 0.95 percent from 1.92 percent as of end 2019, while the Philippines’ 10-year bond rate is currently at 3 percent, which is the lowest it has ever been in our country’s history.

The strong peso. Aside from soaring interest rates, economic crises have always been accompanied by a weaker peso in the Philippines, with the peso depreciating from 26.20 to 53.28 to a dollar during the Asian financial crisis, and from 41.28 to 48.33 during the global financial crisis. This time around though, the peso appreciated significantly from 50.65 to a dollar as of end 2019 to 48.08 currently. Factors responsible for the appreciation of the peso include the Philippine government’s lower debt to GDP, the country’s stronger current account position, the sharp decline in imports brought about by the slowdown in economic activity, and the weakness of the US dollar in general.

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The rise of retail investors. The sharp rebound in global equity markets since March was accompanied by a significant increase in retail investor participation here and around the world. For example, according to Bloomberg Intelligence, individual stock trading reached about 19.5 percent of all US order flows (through June this year) from 14.9 percent in 2019. Here in the Philippines, COL Financial, the country’s largest online stockbroker in terms of value turnover, saw monthly new account openings jump to an average of 10,493 from April to September from an average of only 3,500 in the past two years. This has allowed its share in terms of total value turnover in the Philippine Stock Exchange to increase to 7 percent in the first nine months of the year from 6 percent in the same period in 2019.

A vaccine is found in less than a year. Although the COVID-19 virus is a relatively new, several drug companies have already developed a vaccine including Moderna, Astrazeneca and Pfizer. More importantly, all the said vaccines boast of high efficacy rates while Pfizer’s vaccine was already given emergency use authorization by the US Food and Drug Administration. The rapid pace at which the vaccines were developed comes as a surprise as vaccines normally take 10 to 12 years to develop.

Equity markets recover from a bear market to end the year higher. After falling into a bear market in March, several markets around the world including those in the United States, Germany, Japan and China are now trading above their end 2019 level. This is despite economic conditions remaining poor for many, and some countries suffering from a third wave of infections. Markets performed strongly in 2020 due to the sharp rise in tech stocks as the pandemic triggered a faster shift to digitization. Ample liquidity brought about by record low interest rates, the rise of retail investors, and improving prospects for 2021 brought about by the availability of a vaccine are also pushing up valuations of stocks. The strong performance of global markets is also helping boost the performance of the Philippine stock market, which is now only 7 percent below its end 2019 level. INQ

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