Stock market,
A major blow to the stock market came with the release of mostly disappointing firstquarter earnings. This triggered the first in a series of earnings downgrades for the Philippines by fund managers after similar re-ratings on Thailand and Malaysia, ushering in the start of major sell-offs.
By end-June, the exodus of portfolio investments amounted to a massive $2.2 billion against a net inflow of $ 300 million in the same period a year ago, said a study by the University of Asia and the Pacific (UA&P) entitled, “After the Fall, Taking Stock of the Post-devaluation Philippine Economy.”
Initially, analysts anticipated corporate earnings to grow by an average of 27% to 30% after reaching 25% in 1996. The optimism on corporate earnings growth was fuelled mainly by the sustained expansion of Asian economies by 8% to 10% in the past.
But after the Thai baht and other currencies in the region, including the peso, first got hit by speculative attacks in May, the optimism on corporate earnings started to waver.
The first wave of currency volatility in the region took a turn for the worse on July 2 when the Thai government gave up its costly defense of the baht and announced a “managed float” policy.
Within a week after the Thai decision, the Bangko Sentral followed suit, saying it is allowing the peso to move “in a wider range” against the dollar, in what analysts dubbed as a de facto devaluation.
And while the Philippines was initially looking forward to ending its decades-old ties with the International Monetary Fund (IMF) last year, the regional currency turmoil prompted it to hold on longer to its benefactor as it requested for an extension of the Extended Fund Facility due to a lapse in July last year.
Thailand, Indonesia and South Korea were also bailed out by the IMF from their financial woes last year.
“It’s like falling from a building. There’s no difference between falling from a 42- storey and a 22- storey building because the impact is going to be the same,” Mr. Mendoza said.
The second wave of the regional currency crisis set in by October when Hong Kong — the last refuge of fund managers in Asia — crumbled on the weight of soaring interest rates and speculative attacks on its currency.
That was the last straw that broke the camel’s back for global markets as the Dow Jones Industrial Average — the United States market’s blue chip counter — reacted to Hong Kong’s fall with a 554.26-point, or 7.1%, plunge, eclipsing its Black Monday crash a decade ago.
The US market’s biggest oneday loss formally signalled that the Asian financial crisis had transformed into a global contagion.
As the region sank deeper into the currency-induced abyss, the Phisix reached a four-year low of 1,722.91, its lowest point this year.
Although the market has since partly recovered from its bottom, its ascent had been slow and dreary, pepped up only by minor rallies that lasted for seven to eight days maximum.
By the time the third wave of currency volatility hit the market in December — when the peso plunged to P40 against the dollar, the lifeless bourse could barely manage to post a convincing negative reaction.
When the year closed, the market bared deep scars from the Great Crash. The 30-stock main index nose-dived 41%, or 1,301.33 points, to 1,869.23, almost replicating the 50% loss in the peso’s value since the July 11 de facto depreciation. At this point, the Phisix has plunged 45.8% from its all-time high of 3,447.60 last February.
The broader All Shares Index plummeted 44%, or 449.33 points, to 570.15.
The banking and financial services counter slumped 51.5%, or 549.31 points, to 517.47 as properties sank 48%, or 765.68 points, to 823.66.
The mines lost 39.6%, or 1470.13 points, to 2,240.39 as the oils dropped 63.5%, or 4.02 points, to 2.31.
By yearend, the P3.33-billion average daily value turnover in the first quarter was cut by almost 30% to P2.35 billion. Trading volumes in the stock market had already thinned out as early as June after foreign investors moved out of the Asian region with the first signs of the financial turmoil.
“Many have learned the hard lessons about the market ( in 1997) — that it could turn vicious and relentless, devoid of any sentimentalism and emotion,” said Guoco Securities (Phils.), Inc. in its outlook for the stock market in 1998.
“Don’t expect the lunar year of the tiger in 1998 to end with a mighty roar; instead we hear the region intoning a humbling meow,” cautioned Guoco Securities. It added, “The party is definitely over,” and that the next bull run “will take more than a while, perhaps into the next millennium.”
Analysts agreed it is impossible for the market to retest its all-time high of 3,447.60 this year with the continued assault on regional currency markets.
UBS Securities ( East Asia), Ltd. expects corporate earnings to decline by negative 8% on the average this year. All AsiaCapital and Trust Corp. forecasted local corporate earnings to reach 11% in 1998, but that estimate was made before the peso fell to P40 against the dollar.
The UA& P study said the high interest rate regime will have severe repercussions on the economy as the high cost of capital forces firms to delay expansion plans, thus stifling investments.
Aside from the currency crisis, two distinct factors will skew the market’s movement in 1998: the national elections in May and the El Niño phenomenon.
The uncertainty in the political climate in the first half leading to the May elections, along with the existence of underlying fundamental weaknesses in the economy, will temper attempts by the Philippines to buck regional trends, said All AsiaCapital research head Helen Alvarez.
“Political concerns loom on the sustainability of reforms after the Ramos administration,” Ms. Alvarez said in a recent study.
Another political concern is the credibility of the next president. “If the person elected is not credible, that will deter investments from both local and foreign investors. And when you talk of credibility, it not only boils down to past performance,” said Mr. Mendoza.
He added the two important issues that could swing the vote in the elections of 1998 are peace and order and graft and corruption. “These are two related issues. If a candidate is perceived by investors to bring graft and corruption, that can actually spill over to all the institutions within government, which means you cannot improve the peace and order situation,” the analyst said.
In the post- election phase, what investors will be looking at is the economic policies that the new administration will pursue.
One industry that could weather the storm in 1998 is the consumer sector, particularly food-related businesses. Even if people tighten their belts, they will continue to spend on necessities such as food.
But while the sector may be shielded from the crisis, earnings of consumer companies are not expected to soar. Mr. Mendoza explained that the excess capacity in the industry will give firms less pricing flexibility, especially in the face of competition with imported goods even under an environment of a depreciated peso.
Some listed food and beverage firms which have raised their retail prices are Alaska Milk Corp., La Tondena Distillers, Inc. and San Miguel Corp. (SMC).
Perhaps the most vulnerable to the looming crisis will be the banking and property stocks, along with highly leveraged listed firms “that have mismatched financing long- term assets for short- term funds,” Ms. Alvarez said. Banks will slow down from their aggressive lending activities in 1996 and 1997 as the risk of borrower defaults or liquidity problems increases. Higher provisioning for loan losses will also temper banks’ earnings.
The property, cement and construction sectors will encounter major setbacks this year due to the slowdown in investments and the oversupply situation looming for the cement industry.
Earnings of property firms will be “subdued, flat and unimpressive” with the expected general slowdown in real estate sales, particularly in the high- end, highrise segment. A mild oversupply situation may set in by early 1999, All AsiaCapital said. It said Ayala Land’s sound revenue mix, along with its risk minimization policy, sets it apart from other property firms.
In the telecommunications sector, phone giant Philippine Long Distance Telephone Co. is expected to rise as its phone metering scheme takes effect this year as well as its rate rebalancing, thus, contributing to a stronger revenue stream.
As for conglomerates, those with exposure to growth sectors, particularly utilities and telecommunications, should stand firm despite the crisis.
Mergers and acquisitions will characterize all sectors this year. Just before 1997 ended, Union Bank of Switzerland and Swiss Bank Corp. announced a merger to create the world’s second-largest bank. It was a sign that even industry giants are not sleeping well in these times of global consolidation.
“This will continue in 1998 and probably 1999, it depends on how the crisis will pan out... (It may) take years before ( companies) can recover. That’s why foreign fund managers are not optimistic about 1998,” Mr. Mendoza said.