Tuesday, 17 January 2012

How can the PSE be going up?

John Mangun

TERRORIST threats. Impeachment proceedings. Corruption charges. Global-debt meltdown. Slower economic growth.

The PSE Composite Index reaching a historic high close was absolutely predictable, almost inevitable. In fact, on December 14, 2011, I wrote that the market could reach 5,000 in 2012. That is only about 8 percent higher than where we are now. We can advance higher than that based on the domestic internals that are fueling this market rally.

The Phisix index is up 22 percent in the last three-and-a-half months. Has there been any good news in that time?

How can Philippine Stock Exchange share prices be going up?

One word: money—massive amounts of foreign and domestic money looking for investment opportunities.

For many months, I have been saying there will be very large inflows of capital into the Philippines. And yet foreign direct investment, which all the “experts” worry so much about, is down 24.7 percent over 2010. But even that number is false.

In 2011 foreign companies poured money into their Philippine ventures like call centers and other subsidiaries, resulting in a net inflow of $258 million. But this was 47 percent lower than in 2010 when the net inflow was $490 million. When a foreign company sets up a local subsidiary, they loan the money to the locally registered company to get it started. It is a onetime funding placement and the foreign company does not have to loan much more money to sustain the operation if it is successful.

However, massive amounts of portfolio money did come into the country in 2011.

In the first 10 months of 2011, $7.4 billion was invested in PSE listed stocks. Foreign-investor interest in peso-denominated government securities hit $6.3 billion. That $7.4 billion is the equivalent of all the trading volume on the PSE for three months of trading days. But that only accounts through the end of October 2011. A total of $6.3 billion more was placed in government debt, probably short term.

In addition to the net $7.4 billion in stocks already, with the government signaling as much as a 50 basis points or one half-percent drop in interest rates, some of that $6.3 billion has gone into stocks during the last quarter.

On the domestic side, there is a tremendous amount of money flowing through the economy. Money-supply growth accelerated to 7.2 percent in November, which means that there is more physical money in the economy that must go someplace.

Increasing money supply does often show up in higher inflation. But inflation is lower than the money-supply growth so that infusion of cash is not just going to buy things. It is for investment. Philippine inflation eased to an 11-month low last month.

Another source of money in the economy is lending and this is growing very well.

Outstanding loans of commercial banks grew at a faster rate of 21.7 percent over 2010 and increased at double-digit rates almost every month during 2011.

Companies and consumers are borrowing for good reasons. Corporate loans for production purposes, expansion and the like, had a 22.9-percent growth. This was higher than the 10.7 percent in 2010. Growth in consumer loans also increased 17.9 percent.

Not all of the money is going into the PSE, which is also good. Demand deposits at the banks expanded by 12.4 percent.

However, it takes more than large amounts of money to fuel the stock market. It also takes confidence. It is a good thing to have a government that is sometimes inefficient and late to the party. The private sector in the Philippines is doing a very good job. Look at the banks. The banking system’s asset quality improved with the nonperforming loan ratio sustaining its downtrend path, at 3.3 percent as of end-September 2011 from 3.9 percent in 2011.

In spite of all the problems, local investors believe that maybe this year the administration will turn a little more to the economy. Foreign investors are looking to the Philippines as a safe haven, which is what I have been predicting for a long time. That time has finally come.

The PSE is going up and will continue to rise because the Philippines is rapidly becoming one of the best nations on earth to place funds. Of course, for sustainable economic development, it is all up to the government and its policy-makers. But the foundation of short-term confidence has been laid and the PSE performance is evidence of that.

If big local and foreign money is willing to invest short term in the PSE, it will go long term if the government gets economically serious.

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