PHILIPPINE STOCK MARKET (Closer Look and Review)

JAFFY BRATT R. MANDAWE 2005-27218 B.S. in Business Administration (Mktg)

Presented by:

Presented to:

Prof. MARY ANN GUMBAN Department of Accounting College of Management University of the Philippines - Visayas

1|Page The PHILIPPINE STOCK MARKET ANALYSIS

I. Introduction One of the most important stock exchanges in Southeast Asia and the only stock exchange in the Philippines, The Philippine Stock Exchange (PSE) is the earliest stock exchange in Asia which functioning from 1927. The PSE include two trading floors, one at Central Business District in Makati City and another one at its headquarters in Pasig City. The PSE utilizes a single-order-book system known as MakTrade System. In 2001, it started bond trading. The Philippine Stock Exchange, Inc.is a private organization which offers and assures an impartial, effective, translucent and systematic market for the dealing of securities. (mapsofworld.com)

II. History and Origin On August 8, 1927, the Manila Stock Exchange (MSE) was formed and on May 27, 1963, the Makati Stock Exchange was founded. On December 23, 1992, The Philippine Stock Exchange was formed with the amalgamation of these two Stock Exchanges. Before the amalgamation was took place, both the MSE and the MkSE traded the same stocks of the same companies, although the

2|Page The PHILIPPINE STOCK MARKET ANALYSIS

bourses were split stock exchanges for almost 30 years. In June 1998, the Philippine Securities and Exchange Commission gave the PSE a "Self-Regulatory Organization" (SRO) status. In 2001, one year after the enactment of the Securities Regulation Code, the PSE was transformed from a non-profit, no-stock, member-governed organization into a fledgling revenue-earning

corporation headed by a president and a board of directors. On November 13, 1995, the Stratus Trading System (STS) of Manila Stock Exchange and the MakTrade trading system of the previous Makati Stock Exchange were incorporated when the PSE implemented the "Unified Trading System" (UTS) which was operated by the MakTrade system. On January 15, 2001, the PSE began bond trading and The PSE-RoSS Interface System. The PSE before the mid-1990s was reminiscent of other outcry stock exchanges found throughout Southeast Asia before the

technological advancements made during the last decade. On January 4, 1993, the former Manila Stock Exchange started the

computerization of its operations using the Stratus Trading System (STS) with a company called Intelligent Wave Philippines. Later that year, on June 15, the former Makati Stock Exchange adopted the

3|Page The PHILIPPINE STOCK MARKET ANALYSIS

MakTrade trading system, the same system used on the Stock Exchange of Thailand and developed by the Chicago Stock Exchange. Both systems were linked on March 25, 1994, producing one set of opening and closing share prices, but orders were queued up on two different books.Two years later, on November 13, 1995, both systems were unified when the PSE adopted the "Unified Trading System" (UTS) operating under the MakTrade system. When the PSE started trading bonds on January 15, 2001, the system was modified to allow stock brokers to trade bonds using the same terminal. Also, the PSE-RoSS Interface System, a system allowing stock brokers to access the Philippine Bureau of the Treasury's Registry of Scriptless Securities (BTr-RoSS), was made operational on the same day. Companies are listed in the PSE on the First Board, Second Board or the Small and Medium Enterprises Board.

III. Corporate Overview The Philippine Stock Exchange, Inc. ("PSE" or the "Exchange") is a private organization that provides and ensures a fair, efficient, transparent and orderly market for the buying and selling of securities.
4|Page The PHILIPPINE STOCK MARKET ANALYSIS

PSE traces its roots from the country's two former bourses: the Manila Stock Exchange ("MSE") and the Makati Stock Exchange ("MkSE"). Founded in March 1927, the MSE was the first stock exchange in the Philippines and one of the oldest in Asia. Originally housed in downtown Manila, the MSE moved to Pasig City in 1992. The MkSE, on the other hand, was established in May 1963 and became the second bourse to operate in the country. It was based in Makati City, a budding business district during those days. While trading the same listed issues, MSE and MkSE remained separate entities for almost thirty years. December 23, 1992 marked a milestone for the Philippine capital market when the MSE and MkSE were unified to become the PSE. At present, PSE maintains two trading floors -- one in Makati City and another in its head office in Pasig City. Even with two trading floors, PSE maintains a "one-price, one-market" Exchange through the MakTrade System. This is a single-order-book system that tallies all orders into one computer and ensures that these orders match with the best bid/best offer regardless of which floor the orders were placed. MakTrade likewise allows PSE to facilitate the trading of securities in a broker-to-broker market through automatic order and
5|Page The PHILIPPINE STOCK MARKET ANALYSIS

trade routing and confirmation. It also keeps an eye on any irregularity in the transactions with its market regulation and surveillance databases. In June 1998, the Securities and Exchange Commission conferred to the PSE the status of a Self-Regulatory Organization, which allows the PSE to implement its own rules and impose penalties on erring trading participants and listed companies. In 2001, or a year after the Securities Regulation Code of 2000 was enacted, the PSE was reorganized and transformed from a nonstock, member-governed organization into a shareholder-based,

revenue-generating corporation. Along with this rebirth came the separation of the Exchange's ownership and trading rights, opening the doors for new market participants. On December 15, 2003, PSE shares were listed by way of introduction. The Philippine Central Depository, established in March 1995, provides the securities settlement system for both debt and equity instruments of the Exchange. Its computerized book-entry-settlement system paved the way for a safe and efficient scripless trading.

6|Page The PHILIPPINE STOCK MARKET ANALYSIS

Assuming the role of settlement coordinator and risk manager for broker transactions as well as administrator of the trade guaranty fund is the Securities Clearing Corporation of the Philippines ("SCCP"). SCCP is the clearing and settlement agency for depository eligible trades in the Exchange. Companies are listed in the PSE on the First Board, Second Board or the Small and Medium Enterprises Board. To help the investing public keep track faster of industry performance, listed companies are classified into the following sectors: Financial, Industrial, Holding Firms, Property, Services, and Mining and Oil. More importantly, PSE has adopted an online daily disclosure system to improve the transparency of listed companies and ensure full, fair, timely and accurate disclosure of material information from all listed companies. To address public demand for speedy access to information on the securities market, the PSE's website, www.pse.com.ph, provides comprehensive market data, stock quotations, dividend declarations, trading activities, and other pertinent information on the PSE, trading participants, listed companies and other institutions.

7|Page The PHILIPPINE STOCK MARKET ANALYSIS

IV. How does a Stock Market Performs? Stock Market Performance works as a barometer of the general economy of a country. The rise and fall of share prices at the stock exchange is mostly dependent on the market forces. If the share prices rise or remain stable then it indicates that the companies and the general economy also have signs of stability and growth. On the other hand, a stock market crash can be a result of an economic recession, depression, or financial crisis. Therefore, the share price movements and stock index movements indicates the general economical trend of a country. The market trends that a financial market may have are the following: Primary Trends: Bull Market and Bear Market. A Bull Market indicates that the condition of economy is good, there is no unemployment, the gross domestic product (GDP) is increasing, and the stock prices are up. A Bull Market is accompanied with growing investor confidence and it inspires the investors to buy stocks in anticipation of more capital gains. During a bull market choosing stocks is much easier because everything has an upward trend. A person is called a bull if he has an optimistic thinking and belief that stock prices will rise, and his outlook
8|Page The PHILIPPINE STOCK MARKET ANALYSIS

is termed as a bullish outlook. An exaggerated bull market influenced by overconfidence and/or speculation can create a stock market bubble. Bull markets cannot be a perennial condition and sometimes can head towards a dangerous situation if there is overvaluation of stocks. A Bear Market indicates that the economy is bad, recession is imminent, and stock prices are going down day by day. A Bear Market is always associated with far-reaching pessimism. Investors panicked by anticipation of further losses are provoked to sell stocks. It is very difficult for investors to choose a profitable stock during Bear Markets. One way to make money during bear markets is the short selling technique. Another strategy is there and that is waiting on the sidelines until there is a feeling that the bear market is going to end, and beginning to buy shares only when there is an anticipation of a bull market. If a person has a pessimistic thinking that stock prices are bound to go down, he is termed as a bear and his outlook is a bearish outlook. An exaggerated bear market is often accompanied with declining investor confidence and panic selling and may result in a stock market crash and subsequent recession.

Secondary Trends (Short-Term): Correction and Bear Market Rally. A

9|Page The PHILIPPINE STOCK MARKET ANALYSIS

secondary trend is a transient change of price within a primary trend. The tenure can range from a few weeks to few months. A correction is a temporary decrease at the time of a bull market, and a bear market rally is a temporary increase at the time of a bear market.

Secular Trends (Long-Term): Secular Bull Market and Secular Bear Market. A secular market trend is a trend that is long-term in nature and may last from 5 to 20 years and includes subsequent primary trends. In a secular bull market the bear markets are smaller in duration than the bull markets. In a secular bear market, the bull markets are smaller in duration than the bear markets.

Stock Market Performance is dependent on a lot of factors. Some of the factors are internal and some of the factors are external. One of the important internal factors can be a company's performance. If it continues to have increased revenues and profits and good asset value, then people will be confident on buying that particular company's shares. If they do so, the price indices of that particular company's shares will go up on the stock exchange.

10 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

This is an indication of improved Stock Market Performance. On the other hand, if it continues to run at a loss, then its share prices will go down and people will start selling those shares. Then the price indices of that particular company's shares will come down on the stock exchange and that is an indication of poor Stock Market Performance. The external factors may include changes in government policy, recessions, depressions, natural calamities, unprecedented incidents like the 9/11 disasters etc.

V. The Philippine Stock Market Performance

11 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

The September 18, 2008 lowest quotation was due to the reportedly US Economic Crisis. VII. Analysis (Different Perspective)
12 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

US Financial Crisis Could Lead to Job Losses in RP Just how vulnerable is the Philippines to the effects of the US financial crisis which has been marked among other things by the recent bankruptcies of Fannie Mae and Freddie Mac, two of the biggest home mortgage loan companies; and Bear Stearns, Merril Lynch, and Lehman Brothers, three of the biggest financial institutions, in the US? n her message during the Sept. 18 Philippine Economic Briefing held in Makati City, Mrs. Gloria Macapagal-Arroyo said the Philippines is equipped to withstand the effects of the US financial crisis because of its supposedly sound fundamentals, as well as because of the implementation of tough economic reforms that would result in increased revenues. The recent challenges we face are broadly external but they nevertheless require strong, decisive and targeted action internally, Arroyo said. The heights to which oil and other commodity prices have risen were unexpected and the depth of the financial market turbulence in the US is still unknown. Against this backdrop, the best buffer we have to external vulnerability is our own domestic internal strength.

13 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

A labor economist, however, has argued otherwise. Paul Quintos, executive director of the Ecumenical Institute for Labor Education and Research (EILER) and a London School of Economics (LSE)-trained economist, said the US financial crisis could result, among other things, in job losses in the Philippines. Immediate causes of the crisis To rescue itself from the effects of stock market overinflation, especially in IT (information technology)-related stocks (i.e., the dot com bubble), the US in 2001 blew the real estate and construction bubble. US financial institutions offered low interest rates for home mortgage loans: even those with low income or with virtually no collateral were encouraged to apply for home loans. Their loans, which became known as subprime mortgages, accumulated in US financial institutions starting 2001. To spread the risk exposure of banks to these subprime mortgages, it underwent a process of securitization, in which home mortgage loan packages were combined with others, packaged and sold as bonds and securities called as collateralized debt obligations (CDOs). These were guaranteed in credit default swaps (CDS) by insurance companies such as AIG and sold to other banks, financial
14 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

investment houses, and companies in the US that deal in speculative investments for its high returns. However, beginning in the last quarter of 2006, borrowers especially those with subprime mortgages increasingly failed to pay their amortizations. This caused a ripple of effects on banks and financial investment houses holding both the mortgages and CDOs, as well as those which issued CDS. This led to a series of bankruptcies of banks and investment houses, which were touted as too big to fall. The effects of the subprime mortgage crisis have led to mortgage-credit losses of at least $400 billion, based on estimates by The Economist. The International Monetary Fund (IMF) estimates a loss of some $945 billion worldwide. The US credit crunch following the bankruptcies could lead to recession, Quintos said in an Oct. 2 forum in Quezon City. He added that it could have the effect of contagion to the rest of the world economy. Economic impact on the Philippines Quintos explained that the Philippines is particularly vulnerable to the effects of the US financial crisis because of its neocolonial ties to
15 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

the US. Neoliberal policies of liberalization of trade, investment and finance; deregulation, privatization, and others have exacerbated the countrys vulnerability to the crisis of the global capitalist system, he said. Quintos noted that since August 2007, P2 trillion ($42.52 billion at the Oct. 3 exchange rate of $1:P47.04) in stock values have been wiped out from the Philippine Stock Exchange (PSE). He also cited a 12.3-percent drop in the pesos strength against the dollar, and said that the exchange rate is likely to once more reach $1:P50. He said the crisis could lead to tighter conditions for loans, with higher costs of borrowing and interest rates, and lower capital inflows to the Philippines. He also said the crisis could lead to a slump in the export of goods. He noted that around 18 percent of the countrys exports go directly to the US, while up to 70 percent are indirectly dependent on the US, as well as the European Union or EU markets, through the export of intermediate goods to TNC (transnational corporation) subcontractors in China, Taiwan, Korea, the ASEAN (Association of Southeast Asian Nations), and others for assembly into final goods.

16 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

It is not only the export of goods that could suffer, he said, but also the export of services. He noted that 90 percent of business process outsourcing (BPO) revenues comes from the US market. He also warned of a possible decline in remittances, considering that 51 percent of remittances from overseas Filipinos are from the US. Quintos also said the crisis could lead to further increases in the prices of food and petroleum products as speculative investments look for safe havens such as commodity futures markets. The spike in prices of oil, rice, and wheat in the world market during the first half of the year is being attributed to speculation. With every 10-percent increase in food prices, 2.3 million Filipinos slide below the poverty line, while with every 10-percent increase in petroleum prices, 160,000 Filipinos slide below the poverty line, he said. All these mean lower external and internal demand leading to higher unemployment, lower incomes, lower social spending, and higher taxes in the immediate future, Quintos said.

17 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

He noted that 1/3 of all manufacturing employment in the country is in export processing zones, which he said would particularly suffer the consequences of the US financial crisis. He cited the layoffs of 125,000 workers in the manufacturing sector from July 2007 to July 2008. Other areas he cited as likely to be affected by the crisis are small- and medium-scale enterprises (SMEs), construction, wholesale and retail trade, transportation, agriculture, and BPO firms. Quintos said the Arroyo administration is accountable for how the US financial crisis would be affecting the Philippines because of its subservience to the US and other foreign monopoly capitalists in exchange for their continued support to the regime through

development and military aid, as well as for its aggressive implementation of neoliberal policies for the interest of foreign capital. (Bulalat, ALEXANDER MARTIN REMOLLINO)

How to survive a meltdown The Philippines is considered an emerging market, which is quite an irony considering that its stock exchange is actually the oldest and
18 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

longest operating exchange in Southeast Asia. It has been modestly but steadily growing in the last decade, with robust domestic consumption funded by steady remittances from Filipino workers abroad. Foreign investors poured over $3.4 billion into the capital market last year, buying up stocks, bonds and other securities. On top of that, another $2.928 billion in foreign direct investments went to companies that produced goods both for export and domestic consumption. Combined with the steady inflow of dollars from overseas Filipinos, the influx of foreign exchange was so strong that the Philippine peso appreciated by a whopping 18 percent against the US dollar. These inflows acted as the lubricant that kept the economic machinery operating smoothly and efficiently. When the US crisis surfaced, however, emerging markets like the Philippines were the first casualties of the resulting panic. Preferring to put their funds in investments they considered safe, investors pulled out of emerging markets. The latest available data from the Bangko Sentral ng Pilipinas (BSP) indicated that for the first eight months of the year, about
19 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

$209.5 million worth of portfolio investments have been withdrawn from the country, a complete reversal of last years inflow.

Deputy central bank governor Nestor Espenilla explained that financial institutions around the world had accumulated the spoiled financial products backed by fundamentally weak mortgage loans in the US and the domino effect was cascading in full force. Reminiscent of the 1997 crisis that started in Asia, Espenilla said the fear of loss was just as virulent and contagious. In this, another unique factor came into play and it proved to be the undoing of the entire system: investor sentiment. Everyone had assumed that the financial system, particularly in the US and other developed markets, was mature and well developed. These mature markets had all the checks and balances so that they could anticipate and avoid a collapse of this magnitude. But the collapse of the system sent a chilling message to everybody.

If banks that big could fail, then which else is safe? The painful market realization is nothing and nobody is safe. And with the ensuing panic, everybody seemed to rush for the exits. Banks became too afraid to lend to one another. Banks lend to or borrow from one
20 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

another to satisfy specific financial requirements because their own funds may be locked in other investments. This market phenomenon hardly concerns the public. But its a basic banking operation that keeps the system stable. A disruption in inter-bank lending is disastrous to the whole system. Thats what crashed Lehman Brothers, Espenilla said. When institutions of that size start collapsing, it happens very fast. And when it happens to one, it starts happening everywhere. Perception destructive Market confidence is a nebulous, abstract, unquantifiable

concept that can make or break economies. This is why the entire world watched as US officials bickered over which step to take while financial institutions go up in flames.

The crisis is very serious, said Jose Isidro Camacho, former finance secretary and now the Asia-Pacific vice chairman at Credit Suisse, a financial giant based in Switzerland.

Camacho said the contagion has swiftly spread from just

21 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

mortgage-backed securities to other securitized instruments, stock markets, real estate, high yield bonds and so on, in not one but all financial markets around the world. This has led to a confidence crisis and I am not sure anything could have prevented this given that it was substantially driven by sentiment, Camacho said. He explained that a credit crisis would affect the real economy because banks hurting from the crisis would no longer be as willing to lend as they used to be. Even though Philippine banks are fundamentally strong, their aversion to risk-taking would force them to alter their lending behavior, taking less risks and raising credit standards that could choke borrowers. Businesses that need to borrow would find it hard to do so. Slow credit means slow economic growth. When economic activities slow down, companies that already have bank loans would suddenly find it harder to pay back these obligations. When businesses like these start needing refinancing, Camacho said, they would not be able to do so because banks would be too
22 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

nervous to lend them more money. Credit supply could eventually dry up. This could lead to bankruptcy for a lot of these businesses and that would lead to unemployment, Camacho said. If consumers start worrying about losing their jobs in the next few months or years, they would stop spending on things they do not seriously need, like a new house or a car or even clothes. Simple expenses like fixing the roof, replacing the washing machine or the stove may now have to wait. Things may turn for the worse, especially for an ordinary consumer, who may now have to abandon his dream of buying a new car or a washing machine and focus instead on medical, food and tuition expenses. When private consumption slows down, companies would cut back on production. Cutting back on production would mean downsizing the workforce, leading to more unemployment. The scenario is grim. (Des Ferriols)

23 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

24 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS

25 | P a g e The PHILIPPINE STOCK MARKET ANALYSIS