THE year is about to end, and it is likely that the Philippine Stock Exchange index (PSEi) would end 2014 with more than 20-percent growth. This would be a strong reversal of the 5-percent decline that was recorded in 2013. The last few weeks have seen the PSEi approaching the all-time level of 7,400, but has not broken through it yet. This week the market witnessed the debut of Xurpas, a Philippine apps company that posted 50-percent growth on its listing day and added another 41 percent on its second day. Indeed, these are exciting times for the stock market. The question is: Are we going to experience further growth in 2015?
During a seminar presentation at the Ateneo de Manila University’s economics department on December 1, Dr. Eli Remolona, chief representative for Asia and the Pacific at the Bank of International Settlements, shared the result of his paper “Investing in Emerging Markets: How do Global Investors Differentiate between Sovereign Risks?” The results of this study are instructive on how we can look at sustaining the future growth of the local market.
The study looked at two periods: pre-2008 crisis and post-2008 crisis. It tracked the risk premium in 29 countries, 19 emerging markets and 10 advanced economies. It found that the main driving factor determining risk premium is correlated with the volatility index (VIX), also known as the fear index. It is the implied volatility of Standard & Poor’s 500 over the next 30 days. This was then correlated with selected fundamental factors in an economy, such as, debt ratio, current-account balance, credit rating, gross domestic product (GDP) growth and if the country is an emerging economy. The study found that, prior to 2008, the credit rating and the emerging-economy tag are strongly correlated to risk premium. However, after 2008, only the emerging-economy tag remained as a key predictor of risk premium.
What can be implied from these results? Consider the table below. The upper group represents the stock indices and GDP performance of the major economies (the United States, Germany and Japan). Their stock-market and GDP growth reflect their current and perceived future performance. The lower group represents selected emerging-market economies, including the so-called Association of Southeast Asian Nations (Asean) 3—Thailand, Indonesia and the Philippines. (There is no standard listing of emerging economies, but most would include the countries in this table).
It would seem that the GDP-growth performance of these countries has been outstripped by the growth of their stock markets by about 300 percent, and that the credit rating is not a key basis for their stock-market performance. The emerging economies’ stock markets are growing almost at the same pace. This is possibly the result of asset-management decisions, rather than purely fundamentals. This current performance gives credence to the study’s observation that investment decisions are strongly shaped by external asset-management decisions.
Remolona cited the rise of asset management and index-tracking of emerging markets as possible factors in the current strategy of investments. With only the US showing a return to the growth path, and Japan and Europe in recession, it is likely that the emerging markets will continue to experience good returns in their stock markets in the coming year. Nonetheless, it is still prudent not to lose sight of the fact that this is possibly a phase in investment strategy. Another 20 percent for 2015 will have to come from a strong base.
Historically, the average growth of the Philippine stock market has moved about 12-percent above GDP growth. This means that, with an expected 6-percent GDP growth for 2014, an 18-percent growth of the market can be easily achieved. For 2015 this will require that the economy go back to its 7-percent growth to justify the fundamental base.
It is also important to note that the negative impact of the change in quantitative easing last year shows that investment strategies can change overnight. Also note that, in the Philippines, the share of foreign trading in 2010 was only about 38 percent to total trade; this year, it is about 60 percent. Nonetheless, the good fundamentals of the Philippine economy should remain as the base for investment decisions. They should help shield the markets from severe shakedowns once global asset managers review their portfolio holdings. It will be also critical to further move up from the current investment-grade status to a higher one. Thus, the current fundamentals have to be improved further, since fundamentals and good credit ratings will most likely remain as the rational bases for long-term investment decisions.
Finally, participants in the market, particularly new ones, should have a clear global and regional understanding of investments. Asean integration next year will also pave the way for an Asean exchange, further opening up the markets to more investors and more companies as options beyond the Philippines. The Filipino investor, therefore, will need to increase his or her knowledge and understanding of the global market, in which he or she is now participating.
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FOR more of our views on and forecasts for the Philippine economy and the financial markets in 2015 and beyond, we would like to invite you to attend the Eagle Watch Economic Briefing at the Justitia Room of the Ateneo Rockwell Campus in Makati City, from 9 to 11:30 a.m. on January 22, 2015. For inquiries, call (632) 263-3221 or send an e-mail to info@ifpmphilippines.org.
Alvin P. Ang, PhD, is a professor of economics at the Ateneo de Manila University and a senior fellow of Eagle Watch, the university’s macroeconomic research and forecasting unit.