Why is the stock market up?
This September, the Philippine Stock market index (PSEi) breached the 8300 for the first time in many years. This is a 15-percent increase over the 12-month period so if you bought an Index Traded Fund and you sold it last month, you would have gained 15 percent over your investment. Some stocks actually went up higher, some stocks lesser and others even went lower, but the overall market was up or bullish. The PSEi is composed of the stock prices of 30 companies whose stocks are the most traded in volume and amount, the most liquid stocks in terms of public float, and the biggest capital valuations. There are rigorous requirements and procedures before a company stock is included in the index, and company stocks are removed or added to the index depending on its qualifications. These are almost the same as all the other stock indexes in all the stock exchanges in the world, like the Dow Jones, CAC, SET, and other stock indexes in the U.S., Europe, or Asia.
There are 254 companies whose stocks are listed in the Philippine Stock Exchange (PSE) and not all of them are traded every day. The companies in the PSEi are actually traded everyday so if you own stocks which are in the index you can easily sell them at any given day, which makes investments in these stocks very liquid or easily convertible to cash, with a minimal tax of ½ of one percent. In the last four years the daily volume of transactions in the PSE is between P7 billion ($140 million) to P11 billion ($200 million). These pale in comparison to the billion-dollar volume in the New York or London stock exchanges, but respectable enough in relation to our P16 trillion ($320 billion) GDP.
The major reason for the upswing of the PSE is the substantial liquidity in the Philippine financial system and in the economy, and the world economy. Following the U.S. financial system meltdown in in 2009, and the consequent economic problems of Greece, Spain, and Portugal, there has been a massive injection of liquidity in the financial markets in the U.S. and Europe to reflate the economy and avoid a recession. Quantitative Easing was really the Central banks buying securities from the financial institutions to pump money into the financial markets. This liquidity spilled over to Asia and to most parts of the world's financial markets including the Philippines where half of the stock market volume is accounted by foreign money.
The second reason is the general health of the Philippine economy in the last nine years. The macro-economic fundamentals of the economy, like the consumption and investment growth, balance of payments, strength of the financial system, OFW remittances, BPO phenomenon, and favorable demographics pointed to a growth era for the country. These were validated by the GDP growth rate of between 6 to 7 percent in the last nine years.
The third reason is the individual performance of some of the major companies in the country that were showing earnings growth in the double digits. There are some companies in the stock market where you can really put your savings in for the long term.
Will the market continue to go up? At this time, there is a 65-percent probability that it will go up but not as big and fast anymore. The price/earnings ratios of most of the stocks are already in the 20 times and there are major political factors in the horizon that may affect the economy. So, keep your investments balanced and take a long-term view.
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