Philippine Stock Market Analysis

8/22/2019 Philippine Stock Market Analysis

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PHILIPPINE STOCK MARKET

(Closer Look and Review)

Presented by:

JAFFY BRATT R. MANDAWE2005-27218

B.S. in Business Administration(Mktg)

Presented to:

Prof. MARY ANN GUMBANDepartment of Accounting

College of Management

University of the Philippines - Visayas

1 | P a g eThe PHILIPPINE STOCK MARKET ANALYSIS


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I. Introduction

One of the most important stock exchanges in Southeast Asia

and the only stock exchange in the Philippines, The Philippine Stock

Exchange (PSE) is the earliest stock exchange in Asia which functioning

from 1927. The PSE include two trading floors, one at Central Business

District in Makati City and another one at its headquarters in Pasig

City. The PSE utilizes a single-order-book system known as MakTrade

System. In 2001, it started bond trading. The Philippine Stock

Exchange, Inc.is a private organization which offers and assures an

impartial, effective, translucent and systematic market for the dealing

of securities. (mapsofworld.com)

II. History and Origin

On August 8, 1927, the Manila Stock Exchange (MSE) was formed

and on May 27, 1963, the Makati Stock Exchange was founded. On

December 23, 1992, The Philippine Stock Exchange was formed with

the amalgamation of these two Stock Exchanges.

Before the amalgamation was took place, both the MSE and the

MkSE traded the same stocks of the same companies, although the



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bourses were split stock exchanges for almost 30 years. In June 1998,

the Philippine Securities and Exchange Commission gave the PSE a

"Self-Regulatory Organization" (SRO) status.

In 2001, one year after the enactment of the Securities

Regulation Code, the PSE was transformed from a non-profit, no-stock,

member-governed organization into a fledgling revenue-earning

corporation headed by a president and a board of directors.

On November 13, 1995, the Stratus Trading System (STS) of Manila

Stock Exchange and the MakTrade trading system of the previous

Makati Stock Exchange were incorporated when the PSE implemented

the "Unified Trading System" (UTS) which was operated by the

MakTrade system. On January 15, 2001, the PSE began bond trading

and The PSE-RoSS Interface System.

The PSE before the mid-1990s was reminiscent of other outcry

stock exchanges found throughout Southeast Asia before the

technological advancements made during the last decade. OnJanuary

4, 1993, the former Manila Stock Exchange started the

computerization of its operations using the Stratus Trading System

(STS) with a company called Intelligent Wave Philippines. Later that

year, on June 15, the former Makati Stock Exchange adopted the

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MakTrade trading system, the same system used on the Stock

Exchange of Thailand and developed by the Chicago Stock Exchange.

Both systems were linked on March 25, 1994, producing one set of

opening and closing share prices, but orders were queued up on two

different books.Two years later, on November 13, 1995, both systems

were unified when the PSE adopted the "Unified Trading System" (UTS)

operating under the MakTrade system.

When the PSE started trading bonds on January 15, 2001, the

system was modified to allow stock brokers to trade bonds using the

same terminal. Also, the PSE-RoSS Interface System, a system allowing

stock brokers to access the Philippine Bureau of the Treasury's

Registry of Scriptless Securities (BTr-RoSS), was made operational on

the same day. Companies are listed in the PSE on the First Board,

Second Board or the Small and Medium Enterprises Board.

III. Corporate Overview

The Philippine Stock Exchange, Inc. ("PSE" or the "Exchange") is

a private organization that provides and ensures a fair, efficient,

transparent and orderly market for the buying and selling of securities.

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PSE traces its roots from the country's two former bourses: the

Manila Stock Exchange ("MSE") and the Makati Stock Exchange

("MkSE"). Founded in March 1927, the MSE was the first stock

exchange in the Philippines and one of the oldest in Asia. Originally

housed in downtown Manila, the MSE moved to Pasig City in 1992. The

MkSE, on the other hand, was established in May 1963 and became the

second bourse to operate in the country. It was based in Makati City, a

budding business district during those days.

While trading the same listed issues, MSE and MkSE remained

separate entities for almost thirty years. December 23, 1992 marked a

milestone for the Philippine capital market when the MSE and MkSE

were unified to become the PSE.

At present, PSE maintains two trading floors -- one in Makati City

and another in its head office in Pasig City. Even with two trading

floors, PSE maintains a "one-price, one-market" Exchange through the

MakTrade System. This is a single-order-book system that tallies all

orders into one computer and ensures that these orders match with

the best bid/best offer regardless of which floor the orders were

placed. MakTrade likewise allows PSE to facilitate the trading of

securities in a broker-to-broker market through automatic order and



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trade routing and confirmation. It also keeps an eye on any irregularity

in the transactions with its market regulation and surveillance

databases.

In June 1998, the Securities and Exchange Commission conferred

to the PSE the status of a Self-Regulatory Organization, which allows

the PSE to implement its own rules and impose penalties on erring

trading participants and listed companies.

In 2001, or a year after the Securities Regulation Code of 2000

was enacted, the PSE was reorganized and transformed from a non-

stock, member-governed organization into a shareholder-based,

revenue-generating corporation. Along with this rebirth came the

separation of the Exchange's ownership and trading rights, opening

the doors for new market participants. On December 15, 2003, PSE

shares were listed by way of introduction.

The Philippine Central Depository, established in March 1995,

provides the securities settlement system for both debt and equity

instruments of the Exchange. Its computerized book-entry-settlement

system paved the way for a safe and efficient scripless trading.



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Assuming the role of settlement coordinator and risk manager for

broker transactions as well as administrator of the trade guaranty fund

is the Securities Clearing Corporation of the Philippines ("SCCP"). SCCP

is the clearing and settlement agency for depository eligible trades in

the Exchange.

Companies are listed in the PSE on the First Board, Second Board

or the Small and Medium Enterprises Board. To help the investing

public keep track faster of industry performance, listed companies are

classified into the following sectors: Financial, Industrial, Holding Firms,

Property, Services, and Mining and Oil. More importantly, PSE has

adopted an online daily disclosure system to improve the transparency

of listed companies and ensure full, fair, timely and accurate disclosure

of material information from all listed companies.

To address public demand for speedy access to information on

the securities market, the PSE's website, www.pse.com.ph, provides

comprehensive market data, stock quotations, dividend declarations,

trading activities, and other pertinent information on the PSE, trading

participants, listed companies and other institutions.



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IV. How does a Stock Market Performs?

Stock Market Performance works as a barometer of the general

economy of a country. The rise and fall of share prices at the stock

exchange is mostly dependent on the market forces. If the share prices

rise or remain stable then it indicates that the companies and the

general economy also have signs of stability and growth. On the other

hand, a stock market crash can be a result of an economic recession,

depression, or financial crisis. Therefore, the share price movements

and stock index movements indicates the general economical trend of

a country.

The market trends that a financial market may have are the

following:

Primary Trends: Bull Market and Bear Market. A Bull Market indicates

that the condition of economy is good, there is no unemployment, the

gross domestic product (GDP) is increasing, and the stock prices are

up. A Bull Market is accompanied with growing investor confidence and

it inspires the investors to buy stocks in anticipation of more capital

gains. During a bull market choosing stocks is much easier because

everything has an upward trend. A person is called a bull if he has an

optimistic thinking and belief that stock prices will rise, and his outlook



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is termed as a bullish outlook. An exaggerated bull market

influenced by overconfidence and/or speculation can create a stock

market bubble. Bull markets cannot be a perennial condition and

sometimes can head towards a dangerous situation if there is

overvaluation of stocks.

A Bear Market indicates that the economy is bad, recession is

imminent, and stock prices are going down day by day. A Bear Market

is always associated with far-reaching pessimism. Investors panicked

by anticipation of further losses are provoked to sell stocks. It is very

difficult for investors to choose a profitable stock during Bear Markets.

One way to make money during bear markets is the short selling

technique. Another strategy is there and that is waiting on the

sidelines until there is a feeling that the bear market is going to end,

and beginning to buy shares only when there is an anticipation of a

bull market. If a person has a pessimistic thinking that stock prices are

bound to go down, he is termed as a bear and his outlook is a

bearish outlook. An exaggerated bear market is often accompanied

with declining investor confidence and panic selling and may result in a

stock market crash and subsequent recession.

Secondary Trends (Short-Term): Correction and Bear Market Rally. A



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secondary trend is a transient change of price within a primary trend.

The tenure can range from a few weeks to few months. A correction is

a temporary decrease at the time of a bull market, and a bear market

rally is a temporary increase at the time of a bear market.

Secular Trends (Long-Term): Secular Bull Market and Secular Bear

Market. A secular market trend is a trend that is long-term in nature

and may last from 5 to 20 years and includes subsequent primary

trends. In a secular bull market the bear markets are smaller in

duration than the bull markets. In a secular bear market, the bull

markets are smaller in duration than the bear markets.

Stock Market Performance is dependent on a lot of factors. Some

of the factors are internal and some of the factors are external. One of

the important internal factors can be a company's performance. If it

continues to have increased revenues and profits and good asset

value, then people will be confident on buying that particular

company's shares. If they do so, the price indices of that particular

company's shares will go up on the stock exchange.



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This is an indication of improved Stock Market Performance. On

the other hand, if it continues to run at a loss, then its share prices will

go down and people will start selling those shares. Then the price

indices of that particular company's shares will come down on the

stock exchange and that is an indication of poor Stock Market

Performance.

The external factors may include changes in government policy,

recessions, depressions, natural calamities, unprecedented incidents

like the 9/11 disasters etc.

V. The Philippine Stock Market Performance



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The September 18, 2008 lowest quotation was due to the

reportedly US Economic Crisis.

VII. Analysis (Different Perspective)



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US Financial Crisis Could Lead to Job Losses in RP

Just how vulnerable is the Philippines to the effects of the US

financial crisis which has been marked among other things by the

recent bankruptcies of Fannie Mae and Freddie Mac, two of the biggest

home mortgage loan companies; and Bear Stearns, Merril Lynch, and

Lehman Brothers, three of the biggest financial institutions, in the US?

n her message during the Sept. 18 Philippine Economic Briefing

held in Makati City, Mrs. Gloria Macapagal-Arroyo said the Philippines is

equipped to withstand the effects of the US financial crisis because of

its supposedly sound fundamentals, as well as because of the

implementation of tough economic reforms that would result in

increased revenues.

The recent challenges we face are broadly external but they

nevertheless require strong, decisive and targeted action internally,

Arroyo said. The heights to which oil and other commodity prices have

risen were unexpected and the depth of the financial market

turbulence in the US is still unknown. Against this backdrop, the best

buffer we have to external vulnerability is our own domestic internal

strength.

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A labor economist, however, has argued otherwise. Paul Quintos,

executive director of the Ecumenical Institute for Labor Education and

Research (EILER) and a London School of Economics (LSE)-trained

economist, said the US financial crisis could result, among other things,

in job losses in the Philippines.

Immediate causes of the crisis

To rescue itself from the effects of stock market overinflation,

especially in IT (information technology)-related stocks (i.e., the dot

com bubble), the US in 2001 blew the real estate and construction

bubble. US financial institutions offered low interest rates for home

mortgage loans: even those with low income or with virtually no

collateral were encouraged to apply for home loans. Their loans, which

became known as subprime mortgages, accumulated in US financial

institutions starting 2001.

To spread the risk exposure of banks to these subprime

mortgages, it underwent a process of securitization, in which home

mortgage loan packages were combined with others, packaged and

sold as bonds and securities called as collateralized debt obligations

(CDOs). These were guaranteed in credit default swaps (CDS) by

insurance companies such as AIG and sold to other banks, financial



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investment houses, and companies in the US that deal in speculative

investments for its high returns.

However, beginning in the last quarter of 2006, borrowers

especially those with subprime mortgages increasingly failed to pay

their amortizations. This caused a ripple of effects on banks and

financial investment houses holding both the mortgages and CDOs, as

well as those which issued CDS. This led to a series of bankruptcies of

banks and investment houses, which were touted as too big to fall.

The effects of the subprime mortgage crisis have led to

mortgage-credit losses of at least $400 billion, based on estimates by

The Economist. The International Monetary Fund (IMF) estimates a loss

of some $945 billion worldwide.

The US credit crunch following the bankruptcies could lead to

recession, Quintos said in an Oct. 2 forum in Quezon City. He added

that it could have the effect of contagion to the rest of the world

economy.

Economic impact on the Philippines

Quintos explained that the Philippines is particularly vulnerable

to the effects of the US financial crisis because of its neocolonial ties to



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the US. Neoliberal policies of liberalization of trade, investment and

finance; deregulation, privatization, and others have exacerbated the

countrys vulnerability to the crisis of the global capitalist system, he

said.

Quintos noted that since August 2007, P2 trillion ($42.52 billion

at the Oct. 3 exchange rate of $1:P47.04) in stock values have been

wiped out from the Philippine Stock Exchange (PSE). He also cited a

12.3-percent drop in the pesos strength against the dollar, and said

that the exchange rate is likely to once more reach $1:P50. He said the

crisis could lead to tighter conditions for loans, with higher costs of

borrowing and interest rates, and lower capital inflows to the

Philippines.

He also said the crisis could lead to a slump in the export of

goods. He noted that around 18 percent of the countrys exports go

directly to the US, while up to 70 percent are indirectly dependent on

the US, as well as the European Union or EU markets, through the

export of intermediate goods to TNC (transnational corporation)

subcontractors in China, Taiwan, Korea, the ASEAN (Association of

Southeast Asian Nations), and others for assembly into final goods.



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It is not only the export of goods that could suffer, he said, but

also the export of services. He noted that 90 percent of business

process outsourcing (BPO) revenues comes from the US market.

He also warned of a possible decline in remittances, considering

that 51 percent of remittances from overseas Filipinos are from the US.

Quintos also said the crisis could lead to further increases in the

prices of food and petroleum products as speculative investments look

for safe havens such as commodity futures markets.

The spike in prices of oil, rice, and wheat in the world market

during the first half of the year is being attributed to speculation.

With every 10-percent increase in food prices, 2.3 million

Filipinos slide below the poverty line, while with every 10-percent

increase in petroleum prices, 160,000 Filipinos slide below the poverty

line, he said.

All these mean lower external and internal demand leading to

higher unemployment, lower incomes, lower social spending, and

higher taxes in the immediate future, Quintos said.



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He noted that 1/3 of all manufacturing employment in the

country is in export processing zones, which he said would particularly

suffer the consequences of the US financial crisis. He cited the layoffs

of 125,000 workers in the manufacturing sector from July 2007 to July

2008.

Other areas he cited as likely to be affected by the crisis are

small- and medium-scale enterprises (SMEs), construction, wholesale

and retail trade, transportation, agriculture, and BPO firms.

Quintos said the Arroyo administration is accountable for how the

US financial crisis would be affecting the Philippines because of its

subservience to the US and other foreign monopoly capitalists in

exchange for their continued support to the regime through

development and military aid, as well as for its aggressive

implementation of neoliberal policies for the interest of foreign

capital. (Bulalat, ALEXANDER MARTIN REMOLLINO)

How to survive a meltdown

The Philippines is considered an emerging market, which is quite

an irony considering that its stock exchange is actually the oldest and

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longest operating exchange in Southeast Asia. It has been modestly

but steadily growing in the last decade, with robust domestic

consumption funded by steady remittances from Filipino workers

abroad.

Foreign investors poured over $3.4 billion into the capital market

last year, buying up stocks, bonds and other securities. On top of that,

another $2.928 billion in foreign direct investments went to companies

that produced goods both for export and domestic consumption.

Combined with the steady inflow of dollars from overseas

Filipinos, the influx of foreign exchange was so strong that the

Philippine peso appreciated by a whopping 18 percent against the US

dollar. These inflows acted as the lubricant that kept the economic

machinery operating smoothly and efficiently.

When the US crisis surfaced, however, emerging markets like the

Philippines were the first casualties of the resulting panic.

Preferring to put their funds in investments they considered safe,

investors pulled out of emerging markets.

The latest available data from the Bangko Sentral ng Pilipinas

(BSP) indicated that for the first eight months of the year, about



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$209.5 million worth of portfolio investments have been withdrawn

from the country, a complete reversal of last years inflow.

Deputy central bank governor Nestor Espenilla explained that

financial institutions around the world had accumulated the spoiled

financial products backed by fundamentally weak mortgage loans in

the US and the domino effect was cascading in full force.

Reminiscent of the 1997 crisis that started in Asia, Espenilla said

the fear of loss was just as virulent and contagious. In this, another

unique factor came into play and it proved to be the undoing of the

entire system: investor sentiment.

Everyone had assumed that the financial system, particularly in

the US and other developed markets, was mature and well developed.

These mature markets had all the checks and balances so that they

could anticipate and avoid a collapse of this magnitude. But the

collapse of the system sent a chilling message to everybody.

If banks that big could fail, then which else is safe? The painful

market realization is nothing and nobody is safe. And with the ensuing

panic, everybody seemed to rush for the exits. Banks became too

afraid to lend to one another. Banks lend to or borrow from one



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another to satisfy specific financial requirements because their own

funds may be locked in other investments.

This market phenomenon hardly concerns the public. But its a

basic banking operation that keeps the system stable. A disruption in

inter-bank lending is disastrous to the whole system.

Thats what crashed Lehman Brothers, Espenilla said. When

institutions of that size start collapsing, it happens very fast. And when

it happens to one, it starts happening everywhere.

Perception destructive

Market confidence is a nebulous, abstract, unquantifiable

concept that can make or break economies. This is why the entire

world watched as US officials bickered over which step to take while

financial institutions go up in flames.

The crisis is very serious, said Jose Isidro Camacho, former

finance secretary and now the Asia-Pacific vice chairman at Credit

Suisse, a financial giant based in Switzerland.

Camacho said the contagion has swiftly spread from just



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mortgage-backed securities to other securitized instruments, stock

markets, real estate, high yield bonds and so on, in not one but all

financial markets around the world.

This has led to a confidence crisis and I am not sure anything

could have prevented this given that it was substantially driven by

sentiment, Camacho said.

He explained that a credit crisis would affect the real economy

because banks hurting from the crisis would no longer be as willing

to lend as they used to be.

Even though Philippine banks are fundamentally strong, their

aversion to risk-taking would force them to alter their lending behavior,

taking less risks and raising credit standards that could choke

borrowers.

Businesses that need to borrow would find it hard to do so. Slow

credit means slow economic growth. When economic activities slow

down, companies that already have bank loans would suddenly find it

harder to pay back these obligations.

When businesses like these start needing refinancing, Camacho

said, they would not be able to do so because banks would be too



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nervous to lend them more money. Credit supply could eventually dry

up.

This could lead to bankruptcy for a lot of these businesses and

that would lead to unemployment, Camacho said.

If consumers start worrying about losing their jobs in the next

few months or years, they would stop spending on things they do not

seriously need, like a new house or a car or even clothes.

Simple expenses like fixing the roof, replacing the washing

machine or the stove may now have to wait.

Things may turn for the worse, especially for an ordinary

consumer, who may now have to abandon his dream of buying a new

car or a washing machine and focus instead on medical, food and

tuition expenses. When private consumption slows down, companies

would cut back on production. Cutting back on production would mean

downsizing the workforce, leading to more unemployment. The

scenario is grim. (Des Ferriols)



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