The financial markets in the world continued to be rattled by external events, led by the weakness of the Chinese economy and the plummeting price of oil. The Philippine stock market is no exception, riding in seesaw fashion, mirroring movements of stock markets around the world. Year-to-date, it is down by about 4.3 percent, falling close to 6,000 levels in mid-January 2016. Compared to a year ago, the levels are down by almost 10 percent, and from the all-time high in April 2015, the levels are down 18 percent. This brings us to the question—can the market still recover?
In answering this question, it can be observed that many Filipinos have started investing in the stock market, mutual funds and other kinds of instruments. Thanks to the efforts of various groups trying to increase personal financial literacy, there is a sort of an increased interest, especially among the young professionals and overseas Filipino workers, to invest.
Likewise, the high returns of the stock market in the last five years and the facility offered by online investment brokers further encouraged many to invest. At the highest point of the Philippine Stock Exchange (PSE) last year, the local participation has started to match foreign buying in the market.
This was a critical point because of the foreign dominance dictating the direction of the market with a ratio of about 65 to 35 in the past. However, once it was clear that the US will begin to hike interest rates, foreign funds started to move out, tracking the decline from the all-time high. From henceforth, foreign participation have redominated the market, making the locals take a wait-and-see attitude.
In the briefings we have given, I have observed that many new investors have entered into the market in the last five years. Most have not experienced a “bear” market. In our recent Eagle Watch briefing, we have emphasized that financial markets are not exempt from the natural business cycle.
Meaning, there will be natural ups and downs. Hence, the strategy for accumulation in a bear market is for selective buying of economic growth-linked firms. It is interesting to note that the average revenue and net-income growth of the index firms in the PSE for the last six years coincided with the average GDP growth in the same period of about 6.3 percent. This means that listed firms are actually reflecting the capacity of the economy. Although these do not reflect market growth, they provide a shadow potential of the fundamental growth of the market. In a longer-term investment perspective, the market can reflect this growth, albeit not in a straight-line perspective.
Moreover, the alternative investment options of low-risk savings and time deposit accounts continue to yield just below 1-percent gross annual interest rate. Yet, a considerable sum of resources are just parked in these instruments. We estimated from Bangko Sentral ng Pilipinas data that the combined amount of resources from these two banking instruments is about 40 percent of GDP as of end-2015, expanding by 7 percent from end-2001. It might be surprising to note also that for the same period, the loans to private sector-to-GDP ratio has actually fallen from 44 percent in 2001 to 36 percent in 2014. This implies that the banking system remains highly liquid and has the potential to support not only the stock market, but the needs of the economy in general. There is enough resources to fund infrastructure growth in the future! More important, a recent World Bank report reveals that only 20 percent of Filipinos are saving and only 10 percent have bank accounts. This means that the 40 percent of GDP in banks are owned only by 10 percent. There is still a lot of room for those nonbanked to enter into the formal financial system and provide further investable funds. Hence, it should not come as a surprise that a large amount of money is also lost to scams and other Ponzi-type schemes annually.
Under these conditions, the potential for market growth in the next five years remain positive. There are a lot of opportunities for the financial markets, not only the stock market, to grow. This is not dependent on whoever wins in the coming elections. Hence, what may be important for young and new investors at this time is to study and understand the workings of the economy in a broad sense and how these connect to the financial markets. At the broader perspective, it would be imperative for the incoming administration to look closely at additional financial inclusion strategies to increase the number of people having bank accounts and finding new means to expand personal financial literacy. The private sector, through the financial institutions also has to play a role of providing options of investments that are easy to understand and attuned to the financial culture of Filipinos. As the Philippine society matures, it will not be surprising to see our office janitor monitoring his or her mutual-fund investment as he or she takes his or her coffee break.