Pardo airs ‘cautious optimism’: PSEi will rebound next year
BuSineSSwiSe
IF we go by the Skirt Length Theory, share prices in our stock market will be sky-high, piercing through the roof. The theory goes that the length of women’s skirts is a barometer of the health of the stock market. The shorter the skirt, the higher the share prices will be. If longer skirts become fashionable, it means the market will be in the bearish territory.
The theory, also known as the hemline index, was advanced by economist George Taylor in 1926. Through the years, the theory has been embraced by really superstitious investors. In fact, the theory traces its roots to two historical points. In the roaring ’20s, the US economy basked in the sustained growth of personal wealth leading to new ventures in all areas, including entertainment and fashion. What were considered as scandalous attire a decade before became en vogue: women’s skirt climbed up above the knee. Vice versa, women’s skirts became longer during the Wall Street Crash of 1929 and the Great Depression when flashy fashion gave way to cheaper wardrobe.
These days, the skimpiest of shorts are used as streetwear and the shortest of skirts are worn even in formal parties. But even as modern women’s apparel may reveal a lot of skin, sometimes almost in the exhibitionist-style of presentation, our stock market has remained stuck in the doldrums.
The country’s equities market moved sideways as of this writing (Monday, December 17). The bellwether Philippine Stock Exchange index (PSEi) went down by 0.05 percent or 3.97 points, closing at 7,520.40. The broader all-shares index, meanwhile, climbed 0.08 percent or 3.60 points to 4,510.10. Net foreign selling was recorded at P822.25 million, flaring from last Friday’s net outflow worth P691.23 million.
Sadly, the gods of fortune and women’s exhibitionist fashion have failed to lift up local share prices. The PSEi has been on a freefall since the beginning of the year, becoming the worst-performing stock market in the Association of Southeast Asian Nations (Asean). In early October it actually ended up as the world ’s worst. The PSEi plunged by more than 15.4 percent from October last year, while Indonesia’s stock index climbed by 2.3 percent, and Malaysia and Thailand’s indices went up by 0.33 percent each. While all four Asean stock markets tumbled since early 2018, the local market fell face down. The local market has been experiencing a turbulent 2018. It hit a record close of 9,058.62 in January, and then got battered by both domestic and global developments as the year marched on, plummeting to a near two-year low of 6,843.33 in November.
More than the external factors, the stock market degeneration is mainly because of the government’s wretched failure to tame inflation, which went up in recent months at its highest in roughly 10 years.
Nevertheless, the PSE remains sanguine on PSEi prospect next year.
In an exclusive interview with BusinessWise, PSE Chairman Jose T. Pardo says he is cautiously optimistic that the PSEi will be able to recoup the losses it had in 2018: “We are still of the view that the local stock market is only taking a breather after being on an extended bull run for several years. Investors should take comfort in knowing that lower share prices this year provides opportunities for bargain-hunting. Our plan to implement short selling should aid in enhancing the stock market liquidity, as well.”
These PSE initiatives, which involve the short-selling of securities and the Real Estate Investment Trust
(REIT) framework—both slated to be unveiled in the first quarter of 2019— as well as two new indices and partnerships with the Singapore and Shenzen stock exchanges, are expected to drum up investors’ interest.
Investing in REITs is just like parking your money on real property without actually buying a piece of land. With the approval of the REIT Law or Republic Act 9856 in 2009, many big real-estate companies have expressed interest in transforming portions of their businesses into REITs. This way, they can avail themselves of the tax incentives and additional market capitalization that the law offers. It is expected that REITs will be actively trading on the stock market next year.
Pardo remains pragmatic though. He says that the improving economic health of the US is expected to support the strengthening of the US dollar, “and thus we think the Philippine peso will continue to depreciate in the coming year.”
As of this writing, the peso has weakened by 4.4 percent to an average of 52.62 per US dollar, from its 50.40 per US dollar average in 2017. However, Pardo expects the Bangko Sentral ng Pilipinas (BSP) to make good use of the reforms it has undertaken through the years to defend the Philippine peso from further depreciation. There is also some optimism that the US Fed will take a more dovish tone in 2019 after implementing several aggressive interest rate increases this year.
Pardo points to sound economic fundamentals and expectations of lower inf lation, among other factors, that could win back investors. He sees the prices of goods decelerating in 2019, “especially after economic managers are able to recognize the need to clip runaway inflation as soon as an uptrend became evident.” He believes that the economy is fortunate that the BSP has enough elbow room to tweak policy tools and also has the support of other government agencies in addressing inflationary pressures. Inflationary risks are believed to come mainly from the movement of oil prices and other commodities, more than the tax reforms being introduced in Congress.
One thing that will augur well for the local stock market is the downward trend in global oil prices and subsequent domestic pump price reductions. Crude oil, from a high of $76.41, now hovers at $56.76. The domestic oil prices during the past weeks have gone down by P4.55 per liter of gasoline and P4 per liter of diesel.
As far as hemlines and stock prices are concerned, the line between fact and fiction sometimes becomes blurred. Investors are often handed an interminable muddle of data. In their desire to accumulate as much profit as they can, they make up tales to explain byzantine systems. They understandably tend to cling on to something that will ease their minds or help them in decision-making. It’s fun to talk about the hemline indicator, but you’d certainly make a fool of yourself if you accept such deceptive storylines, or adhere ardently on beliefs that are based on flawed or wistful theories.