31 March 2017

Market Watch

Philippine stock market performance as measured by the Philippine Stock Exchange Index (PSEi) has been considered as one of the most turbulent among the emerging markets. The term emerging market was coined by economists at the International Finance Corporation when they were promoting the maiden mutual fund investments in developing countries. An emerging market has the features but not the standards of a developed market so it can be upgraded to a developed market or downgraded to a frontier market at the discretion of the global index providers. The year that was had shown us that buy-and-hold strategy does not work in emerging markets unless we know the balance between the desire for the lowest possible risk and the highest possible return. Low levels of risk are associated with low potential returns while high levels of risk are associated with high potential returns. But high potential losses must be reckoned because there are no guarantees. We must not measure investment returns based on passive investment strategy where an investor buys and holds stocks even with observable market threats. But we must measure investment returns based on active investment strategy where an investor buys and sells stocks anchored on favorable market sentiment. Although the MSCI Emerging Markets Index opened at 794.14 points on 31 December 2015 and closed at 862.27 points on 30 December 2016 or an investment return of +8.58%, the PSEi opened at 6952.08 points on 29 December 2015 and closed at 6840.64 points on 29 December 2016 or an investment return of -1.60%. MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure stock market performance in emerging markets. Beyond reasonable doubt it was a bad year for passive investors but a good year for active investors. From the year low of 6084.28 points on 21 January 2016 to the year high of 8102.30 points on 21 July 2016, the PSEi made an investment return of +33.17%. But from the peak of 8102.30 points on 21 July 2016 to the trough of 6563.67 points on 23 December 2016, the PSEi made an investment return of -18.99%. PSEi had shown us that we must engage rather than evade market turbulence. But do not enter into uncharted territories unless the potential reward outweighs the potential risk. Before you jump on the bandwagon ponder that past performance does not guarantee future results.

31 December 2016

Trade Wreck

Philippines is fortunate to have an economic growth anchored on consumption but is unfortunate to have an economic partner anchored on compulsion. Philippines and China had been ensnared in territorial dispute after China underscored the territorial claims in the West Philippine Sea that includes the shoals within the Philippines exclusive economic zone. Based on the United Nations Convention on the Law of the Sea (UNCLOS) an exclusive economic zone refers to an area within 200 nautical miles from the territorial sea of the coastal state. UNCLOS provides the regulatory framework for marine conservation, navigational rights, maritime zones and sovereignty. Due to the exhausted diplomatic channels the Philippines commenced arbitral proceedings to the Permanent Court of Arbitration but China refused to partake. As a signatory China agreed to refer the interpretation and application of the UNCLOS to the compulsory and binding dispute resolution procedure of the convention. By prohibiting reservations and adopting provisions on the basis of consensus it was the intention of the UNCLOS to eliminate the use of force in territorial dispute resolution among member states. Why did China refuse to partake? We do not know the answer but what we do know that prolonged territorial dispute could lead to adverse trade relations between Philippines and China. West Philippine Sea Coalition (WPSC) revealed that China warned the Philippines of economic consequences once it starts arbitral proceedings against them at the Permanent Court of Arbitration. WPSC was formed by the concerned citizens to protest absolute violations and pursue peaceful resolution of territorial disputes within the West Philippine Sea. Based on intelligence analysis these economic consequences could range from sanctions to sabotage. WPSC stated that parts of these economic consequences were the spontaneous import restrictions and strenuous inspection protocols imposed on Philippine banana exports to China. Based on the data compiled by Bloomberg the Philippine exports to China decreased to $19.02 billion in 2015 from $21.05 billion in 2014. Economic coincidence or economic consequence? Although the China economic growth as measured by the Gross Domestic Product (GDP) decreased to 6.8% in 2015 from 7.2% in 2014 China remains as the Philippines largest export market. Based on the data forecasted by the Development Budget Coordination Committee from 2014 to 2016 the average annual export growth is 8.0%. Perhaps the Philippines should manage export growth, expand export products and penetrate export markets before the China economic diplomacy agenda turns from bad to worst.