Allure of equities
But regardless of regulatory constraints and warnings of asset bubbles, I believe the inherent allure of investing in equities is too overpowering for most retail investors to resist
The equity market, hand-inhand with the debt market, is a critical component of the Philippine capital markets, which serve as a crucial cornerstone for businesses to tap long-term funding not typically provided by the banking system. These funds usually represent investors, both institutional and retail, in search of better than inflation yields, that are set aside for long-term needs, such as for individual retirement or pension fund actuarial requirements.
Of course, there are also investors, professional, as well as amateur punters, with shorter time frames and the gumption, or for some, an acquiescent ignorance to walk on the razor’s edge, who seize every chance to capitalize on perceived aberrations in the equity market that can provide arbitrage and speculative opportunities. We vividly saw that in GameStop in the United States and not too far back in the distant past, in BW Resources, a gaming stock, and our very own version of the “squeeze” albeit a “pump and dump” variant.
BW rose from P0.80/share to P145/ share in a period of just one year only to see it plummet shortly after to less than P1/share when the alleged partnership with Macau’s gambling tycoon, Stanley Ho, fizzled out, leaving stranded thousands of burned investors with millions of savings gone. And like in any scandal that happens, the inevitable clamor for investigation follows, and new regulations put in place to protect the hapless, unknowing investors who have been taken for a painful ride.
We still have to see what new measures will surface as a consequence of the GameStop saga that inevitably will have its repercussions in our own sphere. Already there is a debate whether something similar can happen in our country.
Although there is an existing Securities and Exchange Commission (SEC) regulation already in place that covers securities lending and borrowing, which effectively enables short selling, admittedly essentially geared for trading participants, there are conditions imposed that can inhibit short selling. To reiterate what I noted in my article last week, these are primarily the prohibitions of naked short selling, possible vague BIR interpretation of stamp duty taxes and the need to have a stockbroker’s master securities lending and borrowing agreement duly registered with the SEC.
The Philippine Stock Exchange (PSE) itself still has to come up with its own framework for short selling. But given the need to attract more interest in our equity market, particularly from the foreign institutions which need hedging mechanisms, it is only a matter of time before PSE formalizes short selling. The bigger question, however, is whether ordinary retail investors will want to buy in and, more importantly, be allowed by the regulators to engage in short selling, particularly of the “naked” type.
Despite these repeated cycles of boom and bust, the reality is that local investors, now attracting younger, savvier and more adventurous types, continue to be dazzled by the bright lights of the stock market, particularly during this time of Covid when idle time coupled with the ease of online stock trading and the allure of easy money is a temptation too easy to succumb to. In fact, in a recent FINEX (Financial Executives Institute of the Philippines) briefing, noted online stockbroker Dino Bate, president of COL Financial Group, the biggest local online stock brokerage, revealed that the trend of local investors taking over the major chunk of the average trading value turnover has become more pronounced in 2020 and in the early weeks of 2021 by as much as 75 percent share.
More tellingly, Dino noted that their firm’s online trades are now more skewed toward non-index stocks, meaning the second liners which are far from being considered as blue chip issues, whose values have either dropped drastically with the onset of Covid and thus poised to improve with the availability of vaccines, invoking expectations of return to economic normalcy, or, those stocks with some hyped-up buzz regarding their prospects as evidenced by the recent spectacular rise in market prices for a handful of stocks favored by retail investors from 7x to as much as 20x higher from their 2020 low.
Despite these repeated cycles of boom and bust, the reality is that local investors, now attracting younger, savvier and more adventurous types, continue to be dazzled by the bright lights of the stock market.
To curb somewhat the speculative tendencies of investors oblivious to the risks of chasing the market price of a stock on the rise, the PSE has actually certain measures in place, such as intra-day trading day halts as stock prices go up and down beyond certain thresholds ostensibly to give investors an opportunity to pause and think through more clearly their next moves.
But regardless of regulatory constraints and warnings of asset bubbles, I believe the inherent allure of investing in equities is too overpowering for most retail investors to resist, particularly now more than ever with the lightning ease of buying or selling stocks with a mere click of the mouse. Ultimately, like any decision we make in life, we have to ensure that we are properly informed as best as we can and are prepared to accept the consequence of our decisions.
Until next week… One big fight!