Stock market suffers from glass half-empty mentality

The stock market maintained its lackluster performance last week, with the Philippine Stock Exchange index (PSEi) dropping 1.4 percent week-on-week and average daily value turnover falling below P3 billion.

This, despite a slew of good news: June inflation trended lower to 5.4 percent, even beating consensus forecast of 5.5 percent; unemployment and underemployment rates both falling sharply year-on-year; a statement from new BSP Governor Eli Remolona that the central bank may cut policy rates in the fourth quarter if inflation falls to 4 percent.

Unfortunately, investors had a glass half-empty mentality and were more focused on the risks.

Take for example when Pagasa declared the onset of El Niño. The resulting drop in rainfall would negatively affect the agricultural sector and could boost inflationary pressure later this year.

Meanwhile, the market is now pricing in a 95-percent chance that the US Fed will increase interest rates by another 25 basis points in its meeting later this month. Because of this, US bond rates shot up and Philippine bond rates followed suit. As of last Friday, the Philippine 10-year bond rate closed at 6.69 percent, higher by 38 basis points compared to its end-June level. Higher yields on bonds make stocks even less attractive to investors.

More companies are also planning to delist. Late in June, Holcim announced plans to leave the PSE after its public float fell to 5.05 percent. Metro Pacific may also delist if the consortium consisting of its principals and new investors succeed in buying at least 31.6 percent of the company’s shares held by the public at a tender offer price of P5.20 a share.

At the same time, very few companies are going public. In fact, the filing of SM Prime’s REIT could be pushed back from its original schedule in the second half of this year because of potentially weak demand.

Delistings coupled with fewer initial public offerings would further reduce the size of the Philippine equity market, making it even less attractive to foreign investors who view size as an important investment criterion.

Despite the abundance of risks in the short term, some things can be done to boost the attractiveness of the market over the longer term.

For example, the Philippine economic growth story will become more compelling if the government succeeds in its efforts to attract and grow foreign direct investments. Aside from helping create more jobs locally, it could help us develop new industries that are fast growing and are attractive to stock market investors.

The government could also address the problems facing the agriculture sector so that we would eventually no longer be reliant on imported food products. This would also help address the problem of inflation on a longer-term basis.

Once upon a time, the Philippine stock market was a hot market as the country benefited from the increase in the value-added tax rate in 2005 and the influx of business process outsourcing firms. This enabled the government to improve its finances, allowing the country to enjoy a credit ratings boost to an investment grade.

I don’t see any reason why the Philippine stock market can’t be in vogue again if the government focuses on addressing the problems facing the economy and allow it to sustain a growth rate of over 7 percent. INQ

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