it’s (really) more fun in the philippines (for a few)

Photo credit: REUTERS/Erik de Castro

Photo credit: REUTERS/Erik de Castro

MAKATI, Philippines – On May 15th of this year, the Philippine Stock Exchange index hit an all-time high of 7,403.65 points. The euphoria of multiple upgrades by the credit rating agencies and the perceived positive outcome of the national elections still had to wear off.

Thirty seven days later, the index closed at 6,182.17 – a massive 16% drop in just over a month.

Forgive my Monday-morning quarterbacking but this steep and costly fall was bound to happen at some point. I just didn’t expect it to happen this fast. I don’t think any of those stock market pundits did either. I feel for those who bought stock on May 15th, they’ve lost a lot of money. What makes it worse is that they were led to believe the market would keep on going higher. That’s what you call a rude awakening.

The Philippine stock market will surpass the high that was hit on May 15th. As to when that will happen, who knows? Anyone who tells you that they do – they’re lying.

Stock prices are ultimately driven by the ability of companies to generate income. Theoretically each company stock has some intrinsic value of what it’s worth. Each stock market analyst worth his salt has some target value for the stock of a company. How he arrives at it – well, there are many ways which includes putting his finger in his mouth, taking it out and figuring out where the wind is blowing. The analyst will always be proven right because unless a company blows itself up it will eventually report income that will justify an analyst’s target price.

The problem is that when you impute time into the equation, very few analysts can say when the pay-off will be. In the meantime, when the stock market and the stocks that comprise it go into a free-fall, very few have the guts to tell an investor – “I’m sorry, I made a mistake let’s get the hell out and fight another day.” Most likely, poor Mr. Investor will hear something like – “it’s okay, things will eventually get better” or “the fundamentals remain intact” or whatever other well-worn gobbledygook that has been peddled out in the past. All this as Mr. Investor sees the value of his investment go down from P100 to P98 to P95 to P85 to P60… And, eventually Mr. Analyst starts becoming real scarce and leaves Mr. Investor poorer for the experience.

I still believe in investing in the stock market. It works if your know what you’re doing. Many analysts remain stuck with theory, “rule of thumb” thinking and conventional but outdated investment philosophies to do well by their clients. The advent of technology has changed the ballgame to the disadvantage of small investors and out of touch fund managers. A buy and hold strategy works for a steady market but not for a small, very volatile and illiquid market like the Philippines. The old adage that the less you trade, the better is no longer always true. Controlling trading and other friction costs to maximize returns no longer works when stocks fall more than 20% regularly. It’s better to spend P5 to sell a stock when it falls P10 when the chances are momentum will make it fall more than P20.

Using macroeconomic data to project the growth of the stock market works only up to a certain point. Ones fortune lies in knowing the individual company stock that you are investing in. How well is that company positioned to take advantage of economic growth? The sad part is that the Philippine stock market and indeed the growth of the Philippine economy will always be hamstrung by our economic situation which does not allow for the full benefits of economic growth to trickle down to the majority of the population. Much as many knowledgeable people choose to ignore it, the benefits of economic growth will, for now, continue to be captured by a relative few.

What that means is that while there is growth, many companies will not be able to fully capture its benefits because the majority of our population will not benefit from it and have the money to buy more things and services from companies who make these things and offer these services. Don’t get me wrong, I’m happy that the Philippine economy is growing very fast. My real beef is that it is sad that not enough of our people get to enjoy this and improve their lot in life.

In a sense, we still live in a feudal state where only a few control the economy. You can’t really blame these few for that. What really breaks my heart is that we will continue to be in this feudal state because the cards are stacked against anyone in the bottom 90% of our population who dare dream of joining the privileged few. That is the reality we find ourselves in and unfortunately none of the candidates for Congress in the last election said anything even remotely close to addressing this problem in a realistic and game-changing manner. For how could they when they themselves (well at least most of them) belong not to the top 10% but to the top 1% of the nation’s economic elite.

The status quo is hard to change. Indeed, it is MORE FUN IN THE PHILIPPINES for those who can afford it.