Hot money: A worthy economic indicator

There has recently been a lot of optimism over hot money as far as the flow of portfolio investment is concerned. There was a complete turnaround in performance from the previous year (2015) posting a net inflow of $1.067 billion in July, a reversal of last year's $160.1 million net outflows. This early, the confidence shown by the portfolio market revealed a positive outlook for our local economic setting.

As its definition goes, hot money moves regularly and quickly between financial markets so investors are sure they are getting the highest short-term interest rates available. Despite its nature of being a “short-term” investment scheme, hot money flow reflects the level of confidence due to measures the new administration taken since it started last month.

Hot money flow reflects the level of confidence due to measures the new administration taken since it started last month.

Hot money mainly comes from foreign portfolio players whose intention is to adopt a wait-and-see attitude on economic stability (or instability). Depending on their perception of the local economic strength, they would either pull out their portfolio or convert it into a more participative investment better known in business parlance as “lock, stock and barrel,” known to be more permanent in nature.

What makes the recent splurge of hot money in the financial market more notable is the fact that July and August are traditionally considered  “dry months” in business transactions (with August even being tagged a “ghost month.”) This is a period where not only portfolio players but likewise businessmen would rather hold on to their horses and wait for the next month.

Although highly volatile in nature, hot money is can be withdrawn anytime when the situation warrants. In practical terms, it doesn’t create jobs but it creates opportunities. At this time when everyone is on an observation mode, the huge local financial participation of this type of money makes the financial environment optimistic.

White hot money suggests investors’ trust in the market, the financing community should distinguish between “tradable” hot money from “hotter money,” which is a product of unscrupulous and illicit activity. Hot money is traditionally poured into our local stock market, which buoyed by offerings from top-listed companies. This has made the scenario bullish enough to prop up investment in the bourse.

The bulk of hot money is composed of shares of stocks at 83.8 percent of the investments at the Philippine Stock Exchange; while the remaining 15.7 percent went into peso-denominated government securities. It is quite providential this time, even as some sectors have expressed doubts about the current president’s leadership. Other allied countries have similarly exhibited cynicism over the crime cleansing done by security forces.  The entry of hot money into our local shores, meanwhile, can be interpreted as an affirmation for Duterte’s government.