Tuesday, 26 October 2010

Is the Philippine stock market going to crash?

John Mangun
Out of the Box
Business Mirror

You decide. Here are some of the arguments for “yes” and “no.”

Yes, of course. There is no justification for what has become a virtual 21 months of higher stock prices. The Philippine Stock Exchange (PSE) index has increased over 125 percent since the February 2009 low.

One of the most important indicators of the stock market is called the Relative Strength Index (RSI). By definition, RSI is “the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions.” The theory behind RSI in regard to our current market is that at some point, too much money flows into the market and there must be a period of rebalancing. In other words, what goes up must eventually go down. And after a time of almost nothing but buying, there must come a time of almost nothing but selling. The RSI is now at 80; anything over 70 is considered “overbought.”

Let’s be honest. Money put into the stock market is unproductive. It does not create anything; no jobs, no goods or services, nothing lasting. While some investors will profit from their speculation, the economy gains little benefit. Sure, the argument can be made that investors will eventually take their profits out and build something of value. And that is exactly the point. Soon, investors are going to pull vast sums of money out of the stock market and create something of value for themselves and the economy. In addition, stock-market players who have made good profits will take their newly found wealth and buy something; cars, houses, clothes and that is good for the economy and bad for stock prices.

It is all foreign hot money. Haven’t you been reading what the local economists have been saying? All this hot foreign money that is invested in the local stock market can come out at any time. And it soon will. Why should the foreign money stay here for long? They are always looking for the next fast profit.

The Philippine economy is having a good year in 2010. You could make the argument that good economic numbers justify a strong stock market. But is there anyone who really believes that the country’s economic performance in 2010 is going to continue? If the stock market predicts the future, then it might be logical to say that the stock- price increase from 2009 was reasonable as the 2010 economy is good. But what about the future? The government still cannot balance its budget. Poverty and population growth keeps sustainable economic development a dream. Can stock prices continue to go up when the 2011 economy might be a disaster again?

Stock-market investors had a nice party these last two years. Now the party is over. The market is going to crash.

Of course, the stock market is not going to crash.

We would like to think that our local market is the same as in other countries. Not true at all. You might be interested in the market but that only means that you are part of the less than 2 percent of all Filipinos who are stock investors.

Although a great amount of foreign money has come into the PSE, it is your money that propelled the market from 2009 to the middle of 2010. It really was not until June 2010 that the foreign money started coming in. The rise from 1,850 to 3,000 was mostly all local funds. Why? In 2008 and 2009, while the Philippine economy was still creating wealth (unlike most of the world), there was a reduction in spending. Excess cash built up in the system. Some of that money went into the market. And as prices continued to go up, more excess funds found a home at the PSE.

Stock markets crash when too much money comes in compared with other investments. That is a bubble. Look at the US. Their market crashed in the 1990s when all they invested were tech and dot com stocks. Then investors put all their monetary eggs in the housing market, which was followed by an exploding bubble. This bubble/speculative scenario is not part of the PSE picture, will not be for a long time.

In 2010 the rest of the economy caught up with stock-market investors in that excess cash started going—to create wealth in the overall economy. And some of the excess funds from that wealth creation will continue to be placed in shares. Prices will go up because once an economy starts moving with sound fundamentals, it continues to grow. And this is a sound economy with low corporate debt, low personal credit, sensible pricing of things like housing, and a strong financial sector.

PSE listed companies’ profit grew 23 percent in 2010. Understand it is not economic growth that fuels corporate profits. It is corporate profits that show up in the economic-growth numbers. Stock prices reflect and then anticipate corporate earnings. Who cares about the economy when you are buying a company’s shares? You need to look at the company then the economy. Yes, there are some share prices that may be considered too high in relation to current earnings. But that does not forecast a price crash. What we may see is a cooling-off period where prices stop going up to let corporate profits catch up with the share price. And when that happens, investors can always shift to other companies that are “cheaper.” When that happens, the broad market will still go up.

This is still orderly and stable and does not exhibit the excesses that precede a crash. Prices are sensibly factoring in the overall economy, cash in the system, and the outlook for the future.

E-mail comments to mangun@gmail.com. PSE stock-market information and technical analysis tools provided by
CitisecOnline.com Inc.

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