Investment News Analysis

When less isn’t more

Philippine Stock Exchange

Yesterday, the Philippine Stock Exchange (PSE) was closed for business following the blinds being pulled down at its subsidiary, the Securities Clearing Corporation – the central clearing house for all PSE-executed trades. What had drawn everything to a halt there was what had drawn Manila’s traffic to a halt – a nationwide transport strike called by unions and transport-worker groups to protest government plans to rid the roads of the iconic jeepney; a vehicle that’s loved and hated, though increasingly hated more.

But the PSE’s closure is likely to have far less impact on Filipinos at large than the transport strike. In fact, outside the rarified broking community of Manila’s central business district, and the investors they represent, it will have had virtually no direct effect.

It won’t bother the powerful families and conglomerate owners whose corporations are listed there either. No one’s been singled out; disadvantaged. To all intents and purposes it was a trading holiday for all their shares. Indeed, when trading resumes there’s likely to be a boost in business as salesmen try to make up for commissions lost during the hiatus.

The fact is, the PSE is not much of a measure of anything – certainly not of the wider economy. The problem is it’s just too small to have any significance as an indicator of anything other than, perhaps, of how a particular company is fairing at a particular time.

Dwarfed by the region’s “trillion-dollar-club” exchanges – Tokyo (TSE: US$5.1T), Shanghai (SSE: US$4.1T), Shenzhen (SZE: US$3.2T), Hong Kong (HKEx: US$3.2T), Bombay (BSE: US$1.5T); National Stock Exchange of India, (NSE: US$1.4T); Korea Exchange (KRX: US$1.2T) – the PSE is tiny. It has a market cap of US$359.5 billion (more precisely, US$359,516,809,600) as of last Friday.

Moreover, among the seven exchanges of the Association of Southeast Asian Nations (Asean Exchanges, a collaboration to boost the Asean capital market), only the two in Vietnam are smaller. But the Ho Chi Minh Stock Exchange (HSX) didn’t exist before 2007, though its forerunner, the Ho Chi Minh City Securities Trading Center, with just two equity issues listed, had been operating since 2000.

Meanwhile, the country’s second bourse, the Hanoi Stock Exchange (HNX) which started life as the Hanoi Securities Trading Center in 2005, didn’t come into being until 2009. The combined market cap of the HSX and the HNX is just US$66 billion.

But, small as they are, they’re growing. And one thing that’ll help their continued growth is that there’s no foreign-ownership limit in domestic listed companies in Vietnam. Originally set at 49%, that was lifted in June 2015 in a bid to attract foreign direct investment – a move, incidentally, that’s paying off.

By contrast, in the Philippines foreign ownership of PSE-listed companies is held fast at 40%. Also by contrast, the Philippines has been stock trading on a bourse since 1927.The PSE itself came into being with the merger of the Manila Stock Exchange and the Makati Stock Exchange in 1992.

And out of 17 major exchanges in Asia, apart from Vietnam’s HSX (the HNX is not included on this list), only Taiwan’s second bourse, the Taipei Exchange, Sri Lanka’s Colombo Stock Exchange and the Kazakhstan Stock Exchange are smaller.

So the big problem, as far as the large institutional investors are concerned, is that the PSE is restrictive. Also, for trading purposes, there’s insufficient stock to buy – and that’s in a region, Asia, whose regulated exchanges account for a full one third of the total market capitalisation of the world’s bourses. Less isn’t more in this business; more is.

It’s also a region most sought after by those institutional investors – Japan, Korea, Hong Kong certainly have no problem drawing them in. Nor do the Asean bourses of Singapore, Thailand, Indonesia and Malaysia.

One way for foreigners to invest broadly in Philippine equities is through the IShares MSCI Philippines Investable Market Index Fund – an exchange-traded fund housing 31 publicly traded Philippine-domiciled corporations. The problem with that though, is that financial stocks account for a full 42.9% of the fund’s total exposure, and stocks from just three other sectors – utilities, telecoms and industrials – make up 43.1% of the portfolio. Furthermore, one company – Philippine Long Distant Telephone – has a weighting of 10.5%. Non-diversification risk, therefore, is huge.

But it’s not just the large institutions who are conspicuous by their absence, even smaller overseas investors are scarce. One statistic. Last year there were 773,547 PSE accounts of which just 1.8% – 13,595 accounts – were held by foreign investors.

In September 2016, the media made a big song and dance about how foreign investors were pulling out of the stock market. They used it as yet another attack on Philippine President Rodrigo Duterte’s anti-drugs policy – claiming that his campaign to rid the country of illegal drugs and the gangs that supply them had scared foreign investors in the PSE away.

The inconvenient truth, however – as that stat shows – is that they’d never been there in the first place; at least not in a number to warrant concern for the overall health of the market. Domestic traders, meanwhile, continued as usual.

Stock markets, like the wider economy, need activity to enable them to grow and flourish – public flotations; new listings, to expand the sectors are essential. At the PSE, however, the number of publicly listed companies remains virtually static. In 2012 there were 251 companies trading on the exchange; today there are 267. In other words, the PSE has added just 17 companies in five years.

Furthermore, more than 50% of the market cap of the exchange’s main PSEi index is accounted for by large conglomerates owned and run by just four families – the Sy family (SM Investments, SM Prime, BDO Unibank); the Ayala family (Ayala Corporation, Ayala Land); the Gokongwei family (JG Summit) and the Aboitiz family (Aboitiz Equity Ventures).

Year-to-date, they contributed to more than 60% of the total return on the index. The return, including reinvested dividends, was 25%.

So, is the PSE what it looks like, a private trading club for the rich and powerful? Well, that may be how it’s turned out but the real problem lies in good old government negligence going back decades. This exchange’s stunted growth is the result of governments repeatedly failing to stimulate the internal economy. Governments are good at talking in the Philippines; not so good at action.

Stock exchanges can only mature and grow with an infusion of new listings. And in the Philippines the odds are heavily stacked against that happening. Floating a company is an extremely expensive business, and critically, funding – loan financing – by Philippine-incorporated banks is minuscule compared to say, by banks in Hong Kong or Singapore.

Underwriting of initial public offerings (IPOs) in the Philippines is not exactly a boom industry – since December 2016 and now only six IPOs have been issued. Among those was one for Pilipinas Shell Petroleum Company – 55.215% owned by Netherlands-based Shell Overseas Investments – and Eagle Cement, owned by billionaire businessman, Ramon Ang, whose Top Frontier Investment Holdings holds 66.1% of San Miguel Corporation, in terms of revenue, the country’s largest corporate entity.

In short, cash backing is not readily available in most cases; it’s only the big corporations – the Philippine household names – who can get into the game. And that, coupled with a remarkable lack of stimulus from government quarters – and, of course, the ubiquitous corruption at all levels of doing business – is why the PSE remains in a bizarre time warp.

This should be a vibrant exchange – by now it should have been in a position to attract secondary listings from overseas. But if it can’t encourage and support primary listings from its own domestic market, the chances of that happening remain somewhere south of zero.

The jeepney and the PSE, oddly, have something in common. Those who run them are resistant to change. There’s no question that the jeepneys with their toxic emissions, broken sub-frames and hellish traffic behaviour have become a liability on the country’s roads – but their owners and operators are not going to fall in with any government plan to modernise and regulate them between now and 2020.

By the same token, the Securities and Exchange Commission – the government regulator of the Philippines’ securities industry – will continue to exhibit its inability to move on. By failing to broaden the appeal of the PSE to attract foreign funds, it will virtually ensure that the country’s capital market remains locked in time.

And while Vietnam’s exchanges become more vibrant, as further market reforms are put in place, the PSE can take its place on a post card alongside those featuring the quaint, crumbling architectural relics of Intramuros and that monument to carbon-monoxide pollution and traffic chaos, the jeepney.

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