ON July 21 I wrote in my column: “I believe that we will see a historic high, and maybe historic highs, before the end of October.” The title of that column was “The PSE is going higher.” The original title included the word “Maybe.” I should have stuck with that.
The best part of this business is the opportunity to be wrong. That keeps you humble and smarter. Of course, if you are an “expert,” you are never wrong. It’s the markets that are wrong, not you. Fortunately, I am not an expert.
The run-up to the September 30 change of economic cycle that I have been writing about has brought the global market typhoon that I expected. However, I did not foresee a tsunami coming. Live and learn, won’t we?
But it is China’s fault.
The policy of “pegging” a currency—keeping the exchange rate in a narrow band—always fails. That is what caused the 1997 Asian Economic Crisis, thanks to South Korea and Thailand. A currency peg is like trying to build an embankment to control the direction of a river. You have to spend a lot of effort and money to make it work. Eventually, the river always wins.
Either the activity becomes too costly and not worth the effort, or the river becomes so strong it overcomes the levee and floods anyway.
Earlier this year, the Swiss National Bank’s decision to keep the Swiss franc artificially low against the euro was just not worth the cost. They let go of the peg and the franc went up 20 percent. Recently, China decided its peg was costing too much in lost trade and the yuan is down 3 percent against the dollar. China is still trying to keep a loose peg of the renminbi (RMB) to the US dollar (USD), but that will, likewise, go completely soon.
The problem is that when a major currency—and the RMB is a major currency—drops its peg, other currencies are affected. The Malaysian ringgit, Thai baht, South Korean won, Indonesian rupee and Singapore dollar have all been hit by the Chinese devaluation: all of them lost value against the US dollar. The Philippine peso is holding up well.
The reason the peso is not falling is because the Philippine economy is nicely balanced between the RMB and the USD. On the trade-weighted effective exchange rate index—measuring the amount of which currency is used for trade—most Asian currencies are strongly dependent on the value of the RMB, not the USD.
For South Korea, RMB transactions account of 28 percent of all trade, versus 13 percent for the USD. Thailand uses the RMB on a trade-weighted basis of 18 percent to 11 percent of the USD.
Amazing that it might seem, the Philippines’s trade-weighted use is perfectly balanced—15-percent RMB and 15-percent USD. What we lose on one, we gain on the other.
So I have been looking at the howling winds and with the stock market down 10 percent from the historic high, I should be seeing panic and investors capitulating and throwing in the towel. Instead, the experts and some of the stock brokers are publicly saying they are still seeing a light, warm summer shower.
One prominent local broker is more realistically calling for a likely move of the Philippine Stock Exchange Index from its current 7,280 level to 7,000 and perhaps, lower. Their 8,000 projection, like mine, is now just a summertime dream—but only for the near future. The end of September marks a critical economic and confidence cycle change. Here is what that means in Filipino terms, not some grandiose global idea.
Confidence in government’s ability to bring economic sunshine is over. The Philippine economy is in a downtrend and the next economic numbers will confirm that. In 2010 we were told that the government would spend billions on infrastructure and local companies geared up for that, reserving cash for the public-private partnership (PPP) projects. Nothing substantial happened. Funds that could have been used for business expansion have been sleeping and in the next months will be released, not for government projects but for the private sector.
The USD will be pushed higher as more governments look for cash and move near debt default. The move into the USD will eventually wind up in stock markets, as there is no other reasonable alternative this time around in an economic downturn, and with interest rates near zero regardless of what the Federal Reserve might do.
Stronger economies, like the Philippines, will sustain growth as private capital moves back to the private sector, instead of waiting on the government for ideas like PPP. That will be reflected in the local stock market, and prices will go higher. But how long will it take and from what level will it start from are the difficult questions. For now, keep your umbrella ready.
E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.
1 comment
Are you saying that September will be better? I have the same feeling, too, though institutional investors may stay on the sidelines because they are badly hit. Will it be because of good and strong economic data that will propel the market forward again?