The stock market sweet spot

The question about where you would invest an extra million if you did not need the money is actually important for understanding the economy and the stock market. People that are clueless about money and the economy always seem to relate stock market performance to economic growth.

There is a strong relationship between stock prices and the economy, but it is not what most people think it is.

Having invested—and advising others—through the local stock market for three decades, I like the Philippines Stock Exchange. Trading is simple and relatively transparent. Stock value is reasonable and there is sufficient liquidity to be able to absorb large amounts of capital. Back in the day, the largest foreign fund devoted to the PSE held $7 million because of low liquidity. Today, there are individual clients that have invested more.

Nevertheless, there has always been the nagging question about the low public participation in the stock market. There are several factors that have kept the number of retail investors down, and I have written about those in the past. However, for those 30 years of experience, it all comes back to the question of where a person would place his extra million.


The Philippines, as have many countries in the past 40 years, has emerged from an economic Stone Age. Ignoring the wild swings in the average annual economic growth, ever since 1988, the economy has only been able to squeeze a 4-percent increase. With the population increase rate, 4-percent growth is just survival stage and 5 percent is an extra bag or two of pan de sal.

With that amount of economic growth, there was no money available for stock market investing.

Then, in large measure because of the fiscal policies of the Arroyo administration, the GDP growth rate broke and held the 5-percent area. That is also the time the stock market started taking off. Even with this growth, investor participation stayed low, contradicting the idea that rising stock prices should create rising significant numbers of investors. Since 2009 we have seen historic high after historic high and still stock market investing remained a small fraternity.

That question about where you would put your extra million now comes into play.

More than 20 long-term studies using short- to extended-time periods in over 30 stock markets have shown that a nation’s economic growth does affect stock prices and investor participation. But it works this way. Too little economic growth and there is no stock market money available. Too much economic growth and it is more profitable investing in a business because more people have more money to spend. It is a sweet spot that varies from country to country.

Too “little” growth, no money. Too “much” growth, buy a business. Both investing in a business and the stock market come with unique risks and effort. Note, you can open a siomai kiosk for P200,000 and a branch of a Chinese restaurant chain for P10 million. So what is the economic growth sweet spot for the local stock market? That is hard to say. We are way ahead in terms of percentage economic growth than those found in other stock market sweet spots.

Listed companies’ corporate profits are still growing at an amazing rate, as is the economy. What I would like to see is when we have reached the sweet spot in the Philippine personal savings rate, which had been steadily rising since 1998 and has been going down since 2009. When the savings rate firmly flattens out, as it has for the past two years, that may indicate that there is balance in spending, investing, and saving. That may create the sweet spot.


E-mail me at [email protected] Visit my web site at Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.


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Turning Points 2018