THE Western stock markets took another well-deserved beating last week. The Philippine stock market was virtually unchanged. And while local stock-market investors are probably getting tired of the volatile trading this month, it is important to remember that the Philippine stock market is one of the best performing in the world for 2011.As of the beginning of August, we were No. 12. If you exclude minor exchanges like Venezuela, Botswana, Bermuda, Jamaica and Iceland, we are around No. 6. Interestingly, Indonesia, Thailand and Malaysia are also in the Top 10.
You might expect the US, Italy and France to be hurting. But also Brazil is the biggie near the bottom, down 25 percent, Russia and Canada are down some 9 percent, and India has fallen over 15 percent. Why are we one of the brightest stock investments on the planet?
The stock market is nothing more than a daily and very visible reflection of the general state of economic consciousness and thoughts of a nation. Investors invest for the same reasons consumers buy. Allow me to explain.
We are told by “experts” that an economy is some sort of gigantic machine of moving parts or similar to the ant colony you see in the garden. In truth, a nation’s economy is nothing more than the result of the dozens of financial decisions millions of people make every day. You are not an ant. You decide how you use your money.
We decide to spend or save, and to buy or sell on the stock market, based on how we feel. That might not seem very scientific but it is true. For an economy to be strong and a stock market to go higher, participants must have a positive attitude about the future and still be prudent about the present.
The West is in chaos. People are scared, pessimistic about the future, and are very cautious about their personal finances, counting every penny. Does that describe you or our stock-market investors in general? No? Then, that is why our stock market is going up.
What are the factors that are keeping Filipino investors positive and still prudent?
The Philippines is not dependent on the West. We missed the export boom but it worked out favorably. Our economy does not rise or fall based on the buying habits of some American in Los Angeles. If a business has only one customer and that customer drops dead, the business will fail. That is what is happening to export-oriented economies and may get worse. We do need our overseas remittances but through four years of global financial disaster, remittances keep going up in spite of all the gloom and doom predictions.
Consumer spending is steadily growing because of low individual debt. If you are worried about the future, you do not spend, significantly slowing business and economic activity. From July 6 to August 8, US consumers deposited nearly $200 billion in the banks. That is $500 for every person. Think of it. That $500 could have bought Nike shoes and a video console and a dinner at a fancy restaurant. From July 2009, Americans have deposited $1.2 trillion in banks. Consumer spending is a major reason why we are growing and they are not. And that is good for local businesses and the stock market.
The Philippine banking system is strong. Do you worry that the next time you go to the bank that it will be closed? Americans do. And so do the Greeks, Spaniards, Irish and Portuguese. Some estimates say that the Greeks are keeping more of their cash in safe-deposit boxes than in the banks’ vaults. That’s scary. Not only is the banking system the foundation of every economic system, it is a focal point of the public’s attitude about the economy. You cannot have confidence in the economy if you do not have confidence in the banks.
Lending interest rates are not zero in the Philippines. You can borrow money almost for free in the US and the Federal Reserve says it is going to stay that way for two years. That should be good for business, right? Wrong. Every person, no matter the economic class, knows that you need to pay to borrow money. If you don’t have to pay interest, something is wrong. Westerners clearly understand personally and for the nations, that too much debt is what caused the problem. They are not foolish enough to raise their borrowing because of low rates.
With zero interest rates, the value of money is cheapened. With reasonable interest rates and the thought that rates might be higher in the future, businesses (the most important borrowers in the economy) make prudent decisions.
Low inflation. The average person is not ignorant. He knows exactly why a buko costs P22 in Manila and P12 in Quezon province—gasoline prices. He also knows there is virtually nothing anyone—or the government, for that matter—can do about it. However, inflation is not just an economic number. Month after month, Americans see that it takes a noticeable amount of more money to buy the same amount of goods and service. And they believe that trend will continue. Not so for the Philippines. The average Filipino does not share with his American counterpart the feeling that a year from now he will be “poorer” than today.
A stable Philippine peso. As much as I think that the peso should be allowed to appreciate more, the key to the deal is exchange-rate stability. An exchange rate that fluctuates too much is bad for business and consumers. If you knew that the peso could be 39 to the dollar next month, would you buy any imported goods today? Of course not, because the peso price would be lower in the near future. In this age of global economies, stable currencies are critical to creating confidence.
Our stock market is higher because of all the factors that give investors confidence for a better tomorrow.
