Anemic, pathetic stock market

Last Monday, the stock market posted a value turnover of P74 million – supposedly its lowest since eight years ago. Over the weekend, the Philippine Stock Exchange (PSE) reported a 51-percent drop in income before taxes during the first seven months of 2002, reflecting the sluggish interest in buying and selling stock shares and bonds.

Taking this line of thinking, how then could one best describe the country’s stock market? Lethargic. Anemic. Pathetic. Comatose. The adjectives could go on and on and on.

What, then, is ailing our local stock market?

The stock market is generally perceived as a reflection of a country’s health, and is also a looking glass of its political and economic ups and downs manifested by how publicly listed companies flourish through the good times and suffer through the bad.

In fact, the stock market always anticipates the business cycle and the economy six months down the road such that, for example in early 1997, when the upward trend in stock market trades started to fizzle out, economic managers and fund managers pushed the panic button. They knew too well that a forthcoming financial crisis was going to hit, and true enough.

The goodies aren’t worth buying

A stock market is robust only when there is promise of healthy profits.

So, are there good securities to invest in these days?

US investment bank Salomon Smith Barney in a study as early as November raised questions on local listed companies’ ability to pay maturing obligations in light of a sluggish economy. An analysis completed a few months ago showed that Philippine companies are nearing a debt crisis, indicating investor doubts on the ability of Philippine-listed corporations to stay afloat.

While the local private sector on the whole "appears capable" of meeting its obligations, there are one or two stories from time to time that hint of defaults. Recently, there were talks within the banking community that holding firms such as Metro Pacific Corp., and even Benpres Holdings Corp., had started non-payment of maturing debts.

In the case of publicly traded banking institutions, their biggest baggage is still the level of non-performing loans. And expect no help forthcoming from Congress. The Special Purpose Asset Vehicle (SPAV) bill – which could have helped banks unload more than P500 billion in bad debts – may not be passed in time for the Sept. 6 recess of both chambers. It looks like some provisions have been inserted to benefit some of the lawmakers themselves.

In the meantime, most analysts are in fact recommending a "hold" on most banking stocks. This simply means: don’t buy bank shares.

The extension of trading hours has not helped boost trade in the bearish market we have. The Philippine bourse used to be one of the few remaining stock markets that operate on a half-day basis together with the bourses of Iran and Taiwan.

The timing to extend trading hours would have been perfect: early this year, our bourse emerged as top performer with the resurgence of foreign funds on the back of improving economic indicators.

But all these have been soured by the growing concern about kidnappings and the general peace and order situation in the country. This makes the Philippines one of the few countries whose stock market can be affected by such issues.

High cost of buying and selling

One concern that the stock market is raising is the high cost of trading in the stock market. Documentary stamp tax (DST) and other charges of such kind, called friction costs, are expenses that do not help the stock market.

PSE officials are now down on their knees begging Congress to please, please remove the unnecessary taxes that have made the RP bourse uncompetitive compared to the markets of our Asian neighbors.

The Lower House has passed a bill removing DSTs from certain stock transactions such as securities borrowing and lending, but the Senate – as usual – has yet to do its share.

On the other hand, the finance department is pleading for a postponement in the elimination of DSTs. With total earnings from DST from the bourse estimated at around P2 billion annually, the timing is deemed undesirable at the moment when the budget deficit has hit P132 billion.

The PSE understandably contends that removing such restrictions and unnecessary costs would eventually lead to increased volume and value turnover, and ergo additional government revenues.

And so the debate goes on and the stock market slide continues.

Too small a market and controlled by few

While the local bourse has been there for decades, it has never really grown to a wider and bigger investor base. Sensational issues such the BW Resources craze-cum-scam in the late 1990s have lured temporary players. Many have lost; few really win.

Continued perceived unregulated insider trading coupled with stories of large losses by the uninitiated stock market greenhorn have further discouraged newcomers to join the stock trading game.

Curing its ills is beyond PSE

For its part, PSE has taken some initiatives to try and cure some of its ills. The election of non-member stockbrokers to the PSE board is a step in the right direction. Its eventual demutualization that would make the bourse more transparent and more accountable to investors is a move long awaited.

In terms of image rebuilding, more improvements may have to be made to address the public perception brought about by the BW scandal. The local bourse may have to do more to prove it is an old boy’s club no more.

But all of the above are mere cosmetics. And will not help one who is anemic and lethargic. You need boosters. But these are beyond PSE’s ability.

For PSE to regain health, the fundamentals have to be revived and strengthened. And most of all, investors confidence must be regained.

What are the bitter pills to swallow? Drastic action to reduce criminality and elimate threats to national security (not photo ops, please); abstinence from politics (what will the politicians do during this moratorium period?); concrete steps (not media sound bites) to stop smuggling and other illegal business practices. Do we have the will to take these pills?

(Should you wish to share any insights, write me at Link Edge, 4th Floor, 156 Valero Street, Salcedo Village, 1227 Makati City. Or e-mail me at [email protected]. If you wish to view the previous columns, you may also visit my website at http://bizlinks.linkedge.biz.)