Download - IPS-21_3_Philippine Stock Market in Perspective

12th National Convention on Statistics (NCS) EDSA Shangri-La Hotel, Mandaluyong City

October 1-2, 2013

PHILIPPINE STOCK MARKET IN PERSPECTIVE

by

Regina Georgia R. Crisostomo, Sarah L. Padilla, Mark Frederick V. Visda

For additional information, please contact:

Author’s name

Mark Frederick V. Visda

Designation Head of Corporate Planning & Research Department Affiliation Philippine Stock Exchange, Inc. Address Ayala Triangle, Ayala Avenue, Makati City 1226 Tel. no. (632) 819-4100 E-mail

[email protected]; [email protected]

Author’s name

Regina Georgia R. Crisostomo and Sarah L. Padilla,

Designation Data Analysts Affiliation Philippine Stock Exchange, Inc. Address Ayala Triangle, Ayala Avenue, Makati City 1226 Tel. no. (632) 819-4100 E-mail

[email protected]; [email protected]

mailto:[email protected]

mailto:[email protected]

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PHILIPPINE STOCK MARKET IN PERSPECTIVE

by

Regina Georgia R. Crisostomo, Sarah L. Padilla, Mark Frederick V. Visda1

ABSTRACT

The Philippine stock market is one of the earliest exchanges established in Asia

and has a rich history of events that have contributed to its development. It is also

considered as a barometer of future economic performance, and for years has served its

primary functions of facilitating the dual role of capital raising for companies and trading

of shares by investors. The paper takes an in-depth look at available historical data since

the unification of the previous two stock exchanges. The time series information provides

insights on the development of the stock market, and how some of its characteristics

persist while some are undergoing gradual changes. Finally, the paper examines several

studies that suggest the stock market’s relationship to economic growth and presents

cross-country stock market development ratios that can serve as jump-off points for

further examination and study.1

I. Brief History of the stock market in the Philippines

The first stock exchange in the Philippines was set up on 08 August 1927 during the

American colonial period as the Manila Stock Exchange, Inc. (MSE). Operations ceased during

the Japanese occupation and resumed in 1946 after Japan’s surrender in 1945. As of 25

January 1946, only fourteen (14) companies were listed in the MSE, divided in the following

sectors: Banks, Sugars, Commercial and Industrials, Insurance, and Mining. There were thirty-

three (33) brokers on record, twenty (20) of which were active as of October 1947.

On 27 May 1963, the Makati Stock Exchange, Inc. (MkSE) was organized. The MkSE

started operations on 16 November 1965. Eighteen (18) companies were listed in the MkSE on

its first day of operations, sixteen (16) of which were also listed in the MSE. In 1973, a

Presidential Decree was passed, ruling automatic listing in both exchanges of securities that

have been approved for listing and trading. Two years later, the Securities and Exchange

Commission (SEC) implemented uniformity of price fluctuations, board lots and trading symbols

1 The authors are all employees of The Philippine Stock Exchange, Inc. Ms. Crisostomo and Mr. Visda are part of the Corporate

Planning and Research Department (CPRD), while Ms. Padilla was previously a part of CPRD but now works for the Market

Education Department. The authors would like to acknowledge and thank former PSE President, Mr. Ernest Leung, for his invitation

and prodding for the team to produce this discussion paper, which aims to support Mr. Leung’s advocacy of educating Filipinos

about the stock market. Any views or opinions, either defamatory or complimentary, are solely those of the authors and do not

necessarily represent those of the PSE. The PSE together with its affiliates and subsidiaries will not accept any liability arising from

the consequences of, and any actions or decisions made in respect to any statements expressed henceforth.

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in both the MSE and MkSE. Composite indices were introduced in MkSE and MSE in 1978 and

1986, respectively, in order to measure market movement.

The Philippine Stock Exchange, Inc. (PSE) was incorporated on 14 July 1992, in

anticipation of the unification of MSE and MkSE. The one price-one market exchange was

achieved through the link-up of the two existing trading floors on 25 March 1994. Overall, there

were 189 listed companies with a total market capitalization of Php1.39 trillion, volume of shares

traded of 704.27 billion, and value turnover of Php364.30 billion.

In 2006, to accommodate the growing diversity of listed companies in the Exchange and

provide better sector comparables, the industry classification of listed companies was revised

and companies were classified according to their major source of revenue, instead of the

primary purpose stated in their articles of incorporation. The six sectors currently being used

were established, namely, Financials, Industrials, Holding Firms, Property, Services, and Mining

& Oil.

Whole day trading was implemented on the first trading day of 2012, starting at 9:30am,

with a recess at 12nn to 1:30pm, and closing at 3:30pm. This aimed to align the Exchange’s

trading hours with other Asian exchanges, and to increase market liquidity by opening up

trading in the PSE to markets in other time zones. During the said year, the PSEi hit 38 record

highs (45 intraday), at a peak of 5,832.83 on 26 December 2012. The PSEi closed at 5,812.73

at the end of 2012; there were 254 listed companies, 234 of which were traded during the year.

Total market capitalization was at Php10.93 trillion, volume traded was 1.04 trillion, and value

turnover was Php1.77 trillion.

During the first eight months of 2013, the PSEi first surpassed the 7,000 mark on 22

April 2013 at 7,120.48. Thirty-one (31) record high instances for the PSEi closing levels have

been achieved, reaching its peak on 15 May 2013 at 7,392.20, a 27.2% increase from its 2012

closing level. Total value turnover as of end-August 2013 has also exceeded the full year value

turnover recorded last year, at Php1.78 trillion.

Figures 1 and 2 illustrate the growth of the PSE in the past 15 years. While the main

index PSEi grew to reflect increasing stock prices, market liquidity also expanded as measured

by total value turnover and trade frequency (number of trades). From less than 5,000 trades a

day during the bear period spanning the late 1990s and early 2000s, the market has now grown

to more than 30,000 trades a day. Aside from benefitting from positive developments in both the

local and international fronts, several factors also contributed to the expansion. These include

the upgrade to a new trading system that could easily handle a significantly higher volume of

trading, and the extension of trading hours to include an afternoon session. The strength of local

company fundamentals also had a big impact to increased interest in Philippine equities.

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Figure 1. Daily PSEi and Total Value Turnover (in million PhP)

Source of basic data: PSE; value turnover data truncated to Php15 billion

Figure 2. Daily PSEi and Frequency of Trades

Source of basic data: PSE; trade frequency data truncated to Php35 billion

It is also interesting to look at the difference over time in average value turnover per

trade in the market, as seen in Figure 3. The data range was narrowed down to value of trades

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up to Php100,000, as this is the interval where most of the trade frequencies occur. The results

show there has been a marked increase from 1998 to 2012 in the number of trades which are

valued lower. Specifically, trades that are valued at Php6,000 and lower have the biggest

frequency for 2012 compared to the largest frequency in 1998 which ranged from Php10,000 to

Php12,000. The comparison between 1998 and 2012 in terms of number of trades valued at

Php2,000 and below has also been staggering, perhaps supporting the perception that there are

more retail investors actively participating in the market today. It should be noted though that the

analysis made here did not consider year-to-year changes, and did not factor in market-moving

events that happened during these middle periods. This could be a subject for further analysis in

the future.

Figure 3. Frequency of Trades based on Value Traded, 1998 vs. 2012

Source of basic data: PSE

Another indication of the continued development of the local stock market can be seen in

its market capitalization (MCap), which estimates the total value of the entire market.

Specifically, Figure 4 shows that the MCap of domestic companies has grown substantially that

it has reduced the MCap share of foreign firms listed in the PSE. Since Sun Life Financial

Corporation and Manulife Corporation listed in the Exchange in 1999 and 2000, respectively,

these two companies have cornered about 50%-60% of the total MCap for several years. As of

2012, this foreign-local ratio has been reduced to 20%-80% in favor of domestic companies.

Apart from improved net income performances that pushed valuations higher, the emergence of

various conglomerates as well as merger and acquisitions which led to the creation of larger

firms also contributed to higher-valued companies.

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100,000

150,000

200,000

250,000

300,000

350,000

Fre

qu

en

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Value (in Php)

Frequency 1998

Frequency 2012

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Figure 4. Total Market Capitalization of Domestic and Foreign Listed Companies


In terms of capital-raising activities due to IPOs and follow-on offerings also referred to

“re-IPOs” (an already listed company conducting another offering to the public), historical levels

have been volatile and in most cases, followed the prevailing market sentiment. The lack of new

listings also predictably coincide with market downturns, as IPO candidates prefer to get the

most value of the sale of shares. It is positive to see though that there are usually more primary

or new shares are issued in IPOs which create more value to the company and investors

instead of secondary shares which mainly benefit majority owners looking to cash out their

investment.

Figure 5 illustrates that early on, primary issuances took up most of the capital raised but

later on, there have been increasing amounts of listed companies undertaking follow-on

offerings. This indicates that there are a listed firms who see a lot of value in continuously

utilizing the stock market to raise funds for their projects, instead of the typical “one-and-done”

listing mindset that other companies have where they barely bother looking at additional equity

capital, and would rather borrow from banks.

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Figure 5. Capital Raising Activities and PSEi Closing Levels, 1994-2012


While there are various components that make up a stock exchange, there are three

main components that can be identified, namely, investors, listed companies, and trading

participants. These three parts interact dynamically to ensure the efficient operation of a stock

market. Each group has also experienced its share of changes as the stock market developed

over the years, but has largely remained dependent on each other’s growth – not letting one

move too far ahead or behind from the others.

Investors can perhaps be referred to as the lifeblood of the stock market, supporting the

success of its counterparts – capital raising activities for listed firms, and the trading of shares

for trading participants. The PSE, through its Stock Market Investor Profile (SMIP) report, only

began tracking the number of investor accounts and the profile of these investors in 2008. The

results every year have shown that, while investors have been growing, the overall investor

base of 525,850 investor accounts has not reached a level that would indicate a widespread

participation in the local market. This total barely accounts for half a percent of the estimated

100 million Filipino population, and may indicate that stock market investment continues to be

limited to those which have a high level of disposable income and educational background to

understand how the market works.

But while the five-year compound annual growth rate (CAGR) of investor accounts has

only been at 4 percent, a new class of investors has been emerging due to rapid technological

advancements. Online investors, which have recorded an astounding CAGR of 42 percent in

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5,000.00

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140,000.00

Follow on (Primary)

IPO (Secondary)

IPO (Primary)

PSEi Closing Levels

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the past five years, already account for 14.9 percent of the total investor accounts base – a 10

percent jump from only 4.3 percent in 2008.

Figure 6. Total Investor Accounts and Online Accounts

Source of basic data: PSE Stock Market Investor Profile Reports

In addition to providing the investor count, the SMIP has also been able to offer insights

into the quality of investors in the market, including investor distribution by age group, income

bracket, gender and location. The limitation of the retail investor profile data, however, is the

lack of complete submission of data from the trading participants. Still, about 70% of the 134

TPs submitted information making the sample more representative of the actual numbers.

Figure 5 shows the distribution and growth of retail investors by age group. While the 18-

29 years old age bracket is the smallest among the groups, it has been growing at the fastest

rate, with a three-year compound annual growth rate (CAGR) of 53%. The growth of the 30-44

age bracket is also worth noting, as it has grown at a CAGR of 32% and has in fact surpassed

the 45-59 age group in terms of percentage share to the total.

This is perhaps indicative of several factors. One is that there is an ongoing shift in the

age composition of investors to an increasingly younger group. Possible reasons for this trend

include greater awareness in general about stock market investing, the emergence of online

platforms making trading easier and more convenient, and declining interest rates in the past

few years making stocks more attractive. The growing population should also be considered as

a factor, in that the increasing share of younger investors might only be in proportion to the

growth of their population base and not because a higher percentage of this bracket has

actually started to invest in stocks. Another factor that could be further studied is whether the

younger age brackets’ disposable incomes have increased over time to enable and embolden

them to enter the stock market.

400,000

450,000

500,000

550,000

600,000

650,000

2008 2009 2010 2011 2012

Total Online Accounts No. of Accounts

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Figure 5. Retail Investors by Age Group, 2008-2012


Looking at investors in terms of their annual income brackets (Figure 6), the less than P500,000

annual income group has grown at 46% CAGR for the last three years, outpacing the two other

income groups, to become the largest group. This trend could be related to the previous

information about a greater number of younger people investing in stocks, as these individuals

are just in the early-to-middle stages of their careers.

Figure 6. Retail Investors by Annual Income, 2008-2012


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100,000

150,000

200,000

250,000

2009 2010 2011 2012

60 and Above

45 to 59

30 to 44

18 to 29

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20,000

30,000

40,000

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60,000

70,000

80,000

90,000

100,000

2009 2010 2011 2012

Less Than P500,000

P500,000 to P1Million

Above P1Million

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Regarding the location of investors indicated in Figure 7, it is not surprising to see that

majority of investors are situated in Metro Manila, the hub of economic activity in the country.

While the PSE has made efforts to reach out to areas outside of Metro Manila – even

establishing a satellite office in Cebu in 2011 and conducting multiple roadshows in Cebu, Iloilo,

Cagayan de Oro and Davao – the overall interest in stock market investing in these regions

remains largely untapped.

Figure 7. Retail Investors by Location, 2008-2012


Stock exchanges are usually home to the world’s biggest companies, and this is no

different in the Philippines, which carries widely-recognized local corporations such as PLDT,

Ayala Corporation, San Miguel Corporation, and SM, among others. However, despite nearly

800,000 companies registered and licensed by the Securities and Exchange Commission (SEC)

to do business in the Philippines, only 253 firms have their shares publicly listed in the PSE, a

measly 0.03% of the total. The small number of listed companies could be attributed to various

reasons such as a prevalent culture of family corporations hesitating to open up to a more

diversified ownership structure, cost barriers to raising capital through the stock market, and a

general lack of understanding on how the market can be beneficial in many ways for

companies.

Further, based on the Top 1,000 Corporations in the Philippines report released by the

SEC in 2011, only 93 listed companies made the cut when measuring total revenues, and 28

made it into the Top 100. This provides some insight into the overall quality of companies listed

in the Exchange, and could potentially fuel further discussion on whether listed firms indeed

represent the economy’s growth and movements. It should be noted as well that the Top 2 in

the rankings (Petron Corporation and Manila Electric Company) are listed companies, which at

the very least confirms that the shares of stock of the highest-earning firms in the country are

publicly listed and traded.

As earlier mentioned, trading participants (TPs) have been integral in the establishment

of the country’s two stock exchanges and their eventual consolidation. To date, there are 184

TPs in total, but only 134 are active. Even more so, 20 out of the 134 brokers account for about

an 80 percent share of total value of trades in a year. This statistic is indicative of the reality that

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40,000

60,000

80,000

100,000

120,000

2009 2010 2011 2012

Foreign

Mindanao

Visayas

Luzon

Metro Manila

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the market continues to be too small to be able to absorb the high number of TPs, especially

with the Philippines’ larger counterpart exchanges in the region only holding an average of 40-

50 brokers.

The PSE is host to 111 local and 23 foreign TPs. Historically, the share of each group to

trading activity has fluctuated and largely depended on market conditions at certain points of

time. Figure 8 shows the distribution of total value turnover among local and foreign TPs since

1994. Local TP trading activity remained robust in 1994 up to 1999, even outpacing foreign TP

trading levels early on. However, the lingering effects of the 1997 Asian financial crisis

compounded by adverse political and economic conditions on the local front combined to create

a drag on trading activity and forced several brokers to suspend their operations. From 184 total

TPs, the number was reduced to 150 in 2001 and further declined to its current count of 134

brokers. While total trading activity also dropped significantly, the distribution between local and

foreign brokers became in favour of the foreign TPs from 2001 to 2004.

The support of local TPs to the market then started to pick up again in 2005 as concerns

on the overall health of the political and economic systems were slowly alleviated. Even with the

occurrence of the 2008 crisis, unlike in the early 2000s, local TPs have been able to maintain

their share of about 50% to total trading activity. As foreign funds have flowed into emerging

markets during the past 3 years, local TPs have matched this surge, which is an encouraging

sign for the sustainability of local brokerage houses over the long-term.

Figure 8. Value Turnover for Local and Foreign TPs, 1994-2012


II. The Filipino’s perception of the stock market

According to the first Consumer Finance Survey (CFS) conducted by the BSP in 2009,

only 21.5% of the households have bank accounts, while only a very small percentage of these

owned securities and investment accounts such as stocks, bonds, mutual funds, and unit

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Local TP

Foreign TP

PSEi Closing Levels

Index value

Turnover (in P bn)

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investment trust funds (0.4%). In NCR, 0.8% had invested in any of these financial instruments

while in AONCR, the percentage was negligible.

In the June 2009 survey of the Social Weather Stations, it reported that only 1.0% of the

Filipinos said that they own any stock. This is consistent with the number of investor accounts

opened in stockbrokerage firms, as earlier cited that approximately, only 1/2 of 1.0% of the

country’s population are stock market investors, which is equivalent to 525,850 accounts. This

number could be lower as there are some investors that have accounts in other brokers and

thus counted several times. This pales in comparison to the US, where a reported estimate of

50% of the population have investments in the stock market through various products that their

exchanges offer. Other countries in Asia such as Hong Kong, Malaysia and Singapore, also

have higher investor bases that represent 35.7%, 12.5% and 12.0% of their respective

populations. There is a possibility that the size of these countries’ economies, combined with the

higher level of sophistication and product diversity of their stock markets, have driven up their

investor participation.

On the other hand, retail investors in Thailand account for only 1.0% of the country’s

population, while Indonesia’s retail investors comprise about 0.15% of its population. In terms of

size of the economy, these two are closer peers of the Philippines. Indonesia’s lower investor

population ratio despite having a bigger economy could be attributed to also having an

enormous total population.

There are many factors that possibly explain why Philippine’s investing population is only

minute relative to the total population. One is that the prevalence of poverty in the country could

mean that those who do not have the funds to invest could not be expected to participate in the

stock market as investors. But if analysed further, assuming a population of 94 million, of which

20.4 million (or 21.5% based on BSP data) have accounts in a bank, the 500,000 accounts in

the stock market represent a mere 2.4% of the people with funds to invest in instruments (such

as shares of stock) other than basic deposits. If one is to be more specific, of the 21.5% banked

households (i.e., those with deposit accounts), only 60% had interest-bearing deposit accounts.

This further indicates that a significant number of deposit accounts had an average daily

balance below the required amount to earn interest or had earned a negligible amount of

interest. Assuming we only get the 60% of the total households with deposit accounts, since

only they have “sufficient” funds for investment by meeting the minimum required average daily

balance at the very least, there are still 11.7 million (95.9%) potential stock market investors but

have not gone to other non-bank deposit forms of investment, such as the stock market.

III. Relationship of the stock market to economic growth

Recent market performance

The globalization of economies has created an environment in which stock markets

around the world can be affected by developments in various regions. The Philippine stock

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market, in particular, has found itself moving in step with the US market for the better part of its

existence, owing to the Philippine economy’s dependence on the world’s largest economy.

However, looking at about two decades’ worth of data from 1992-2013, it can be observed that

the two markets’ stock indices have moved in divergent paths at different points during the

period before again moving nearly parallel to one another. (Figure 9)

Figure 9. US (DJIA) and Philippine (PSEi) Stock Indexes

Source: PSE, Bloomberg

The first divergence point can be seen in early 1997, which signaled the 1997 Asian

Financial crisis. Stock markets in the region including the Philippines suffered significant losses

during this period. The PSEi seemed on the way to recovery after the crisis, but was again set

back by the uprising against then President Joseph Estrada combined with the September 11

terrorist attacks in the US during the early 2000s. The Estrada trial and eventual ouster,

specifically, may have had long-lasting effects on Filipinos’ perception of the stock market as the

alleged stock price manipulation of one of the listed companies linked to Estrada and his allies

led to massive investor losses.

Slowly but surely, the Philippine stock market recovered from its troubles and

experienced a strong run along with most global markets from 2003 to 2007. Unfortunately, the

market’s path was derailed by the US subprime crisis which set off a chain of events that led to

a full-blown financial crisis, particularly in the US and Europe. A global bear market ensued as a

few countries defaulted from enormous amounts of debt while some were on the verge of

defaulting as well.

While the effects of the latest crisis continue to linger up to this day and has considerably

slowed the recovery of Western countries, Asian economies proved to have been hardened by

their own financial crisis in the late 1990s. After bottoming out in 2008, stock markets in Asia

started an unprecedented run that saw the rise of emerging markets such as the Philippines and

Indonesia. These emerging markets had become choice destinations for investments looking

for higher yields given the uncertainties in most developed markets. The second divergence

point in the graph between the Dow Jones Industrial Average and the PSEi also occurred during

PSEi

DJIA

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this period, with the PSEi’s current run-up being supported by the impressive economic growth

of the Philippines.

These two divergence points can be seen as markers that started or could potentially

start a shift in the Filipino investment paradigm. The first one, as mentioned, clouded the opinion

of many Filipinos about the stock market and, perhaps unfairly, magnified the risk involved in

investing in stocks. The declining interest from that point on can be seen in the ratio of local to

foreign trading activity, as local trading plummeted to 39.4 percent in 2003 and averaged 49.3

percent from 2001-2008, encompassing the market bull run and the succeeding global financial

crash. The absolute figures in Figure 11 also confirm this observation.

Figure 10. Local-Foreign Value Turnover Ratio, 1998-2012 (in %)

Source of basic data: PSE Trading Participants’ Ranking Reports

Figure 11. Breakdown of Value Turnover Ratio by Local and Foreign TPs, 1998-2012 (in Php billion)

Source of basic data: PSE Trading Participants’ Ranking Reports

However, since the market started recovering in 2009, local support also began to

strengthen, keeping trading activity afloat by averaging about 62 percent share of total trading

value from 2009-2012. Even as foreign funds started to flow as a result of the country getting

upgraded to sovereign investment grade rating, local investors remained steady and kept their

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3,000

3,500

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Aug2013

Foreign TP

Local TP

0%

10%

20%

30%

40%

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70%

80%

90%

100%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Aug2013

Foreign Ratio Local Ratio

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share at slightly above 50 percent. The earlier mentioned rise of online investors similarly gave

reason for the continued strength of local investment as seen in Figure 12, which shows that

more than half of the online retail investor population consist of young professionals and that

these online accounts are highly active (Figure 13). The market education efforts of the PSE

and its trading participants also helped develop a heightened awareness of the stock market to

a younger breed of investors that had a high risk tolerance.


In relation to the trends identified above, one of the more common views about the stock

market’s role is that it serves as a leading indicator for future economic performance. Investors

often look to a country’s stock price index to provide an idea on how the economy will perform,

given that the index is representative of the largest companies which operations have a

significant effect on economic activity. A recent study by PriceWaterhouseCoopers (Hawksworth

and Teh, 2013) looked into the US and UK stock markets to see if indeed they act as reliable

indicators for the real economy. To find out, statistical regressions were made using quarterly

real GDP growth, unemployment rates and stock index changes. The results showed US stock

market movements to be strongly related to GDP and unemployment changes one quarter

ahead, taking into consideration the US population’s high participation rate in stock market

investing. The Americans’ consumer spending is seen to be impacted by changes to stock

prices as their direct holdings rise and fall with the movement of share prices. This

demonstrates the so-called “wealth effect”. On the side of the UK market, the main difference

lies in their investor composition – UK stocks are primarily held by institutional investors such as

asset management firms, pension funds and life insurance companies, thus reducing the direct

impact of share price changes. This in turn makes the UK economy take a longer time to

consider stock market movements at about 3 quarters for GDP growth and 12 months for

unemployment rate.

The PwC study also presented another way of looking at stock market movements in

terms of the extent to which growth from one quarter feeds through to the next, which is referred

to as a “momentum effect”. The results showed that there are high momentum effects in the US

economy, with growth in one quarter feeding through strongly to growth in the next quarter. A

Figure 12. Online Retail Investors by Age

Group (in %) Figure 13. Active vs. Non-Active Online

Accounts

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potential reason cited for this could be related to stock price increases triggering a short term

boost in consumer spending, which will then have an effect on the economy, boosting growth

and reducing unemployment. In the UK, however, the momentum effects had less of an impact

probably due to stock market effects in the jurisdiction operating slowly through business

investment rather than consumer spending as observed in the US.

Meanwhile, Levine and Zervos (2013) observed from cross-country regression results

that stock market development is positively associated with long-run economic growth. Using

pooled data coming from 41 countries during the period 1976-1993, the study analysed the

correlation between stock market and economic growth, which was measured by a number of

control variables such as initial income (logarithm of initial real per capita), initial education

(logarithm of the initial secondary school enrollment rate), a measure of political instability

(number of revolutions and coups), ratio of government consumption expenditures to GDP,

inflation rate, and black market exchange rate premium. On the other hand, overall stock

market development was approximated using a customized index, which included variables

such as market capitalization ratio, total value traded ratio, turnover ratio, and the International

Arbitrage Pricing Model used by Korajczyk (1996) to measure stock market integration.

Stock market development ratios

To better understand some of the ratios used by the Levine and Zervos paper,

descriptions and comparative data are provided. These ratios are used to indirectly measure the

development of a country’s stock market relative to the size of its economy.

Market capitalization (MCap) to Gross Domestic Product (GDP) ratio is usually used to

gauge whether a market is overvalued or undervalued. In general, MCap to GDP ratios above

100% indicate that a market is overvalued, while ratios below 50% indicate that a market is

undervalued. MCap to GDP ratio also measures capital of listed firms at market price multiples

of subscription values, subset of all enterprise with wide variations in value from nominal to

multiples magnified by significance of foreign investments like HK and Singapore. In stark

contrast to low end Shanghai, Shenzhen and Osaka with robust economies in any event.

Figure 13 below shows the 2012 Domestic MCap to GDP ratios of Asian countries,

including the Philippines, and United States of America and United Kingdom, using data

gathered from the World Bank and World Federation of Exchanges (WFE). As seen in the chart,

Hong Kong Exchanges has the highest MCap to GDP ratio at 1,075.2%. The Philippine Stock

Exchange ranked in the middle at 91.6%, while Osaka Stock Exchange ranked the lowest at

3.4%.

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Figure 13. 2012 Domestic Market Capitalization to GDP Ratio (in %)

Sources of basic data: World Bank, WFE

Significant indicators used alongside the MCap to GDP ratio are the value turnover to

GDP ratio and value turnover to MCap ratio, which both measure liquidity. Figure 14 shows the

2012 value turnover to GDP ratio of the same set of countries. Hong Kong Exchanges again

recorded the highest result at 420.1%. The Philippine Stock Exchange was one of the lowest at

13.9%, while Osaka Stock Exchange again recorded the lowest ratio at 2.39%.

Figure 14. 2012 Value Turnover to GDP Ratio (%)


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Figure 15 illustrates 2012 value turnover to domestic MCap ratio. Shenzhen Stock

Exchange topped other countries at 206.0%. The Philippine Stock Exchange was second to the

lowest at 15.2%. Bombay Stock Exchange ranked lowest at 8.7%.

Figure 15. 2012 Value Turnover to Domestic MCap Ratio (in %)


Figure 16 shows 2012 capital raised to GDP ratio. Hong Kong Exchanges ranked the

highest at 15.0%. The Philippine Stock Exchange placed fourth at 2.0%. Korea Exchange

recorded the lowest ratio at 0.1%, while Osaka Stock Exchange, Bombay Stock Exchange, and

London Stock Exchange did not report any capital raised for the period.

Figure 16. 2012 Capital Raised to GDP Ratio (in %)


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The ratios above indicate that, at least for the Philippines, the depth of the stock market

in terms of liquidity and its ability to facilitate capital expansion does not yet reflect the prevailing

stock prices which are currently at expensive levels relative to their peers. But there could

possibly be a rebalancing of such prices in the horizon, as the economy continues to grow and

listed companies become more profitable to justify their stock values.

A 2012 report by Standard Chartered Bank shares a similar view, in that the bank

expects the Philippines to undergo a “re-rating process” similar to what Indonesia went through

during the period 2006-2010, where the Indonesian market’s price-earnings (P-E) ratio

expanded 3.5 percentage points as a result of bright prospects that included strong possibility of

investment grade status, increasing per capita income, and greater investment due to political

stability. From the two charts below, Standard Chartered has observed that the Philippines has

already begun the re-rating process in mid-2010.

Figure 17. Price-Earnings Ratios of Indonesia and Philippines

Source: Standard Chartered Equity Research

The research noted though that the key question remains if the likelihood of earnings

growth by listed companies can expand faster than the market forecast in the next two years.

Another study examining stock market development and economic growth was

conducted by Mohtadi and Agarwal (1998). The paper looked at 21 emerging markets, which

included the Philippines, from 1977-1997 and found a positive relationship between the two

indicators using two models to estimate long-run effects. It should be noted, however, that the

study did not present results on a per-country basis, and just considered the overall results for

the emerging markets data set. The first model utilized two steps to test whether the stock

market indeed has an effect on economic growth. Real investment as a fraction of GDP was first

regressed on three stock market variables, namely market capitalization ratio, total value of

shares traded ratio, and turnover ratio. The second step involved regressing a growth variable

derived from the World Development Indicators (2000) data set against the “fitted” value of

investments, foreign direct investment (FDI), GDP, and secondary school education. Based on

the results, turnover ratio, FDI, GDP, and fitted investment all showed strong positive influence

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on aggregate growth. Model 2, meanwhile, had a more direct approach in analysing the

relationship between stock market development and economic growth instead of looking at

investment behaviour. The growth variable from Model 1 was regressed against the variables

used in the same model. However, the results showed that turnover ratio, FDI and secondary

education were statistically significant and had positive relationship to growth.

Mohtadi and Agarwal further noted that different ratios were highly significant for the two

models – for the two-staged model, the market capitalization ratio was the significant stock

market indicator while in the direct test model, turnover ratio served as the significant stock

market indicator. A possible interpretation for this result is that for model 1, a large-sized stock

market can lead to higher investment opportunities, showing market capitalization to be a better

instrument to represent investments. On the other hand, model 2, by controlling for investment,

reduces the significance of market capitalization.

IV. Conclusions

Historical data has presented that while the local stock market has been growing, it has

not expanded at a pace quick enough to match its counterpart markets. While one may point to

a variety of reasons, these can all be interrelated and has causal effects to other growth-

hindering factors. Consider, for example, the low awareness and negative perception of the

stock market investing that have been pervasive issues which continue to keep investor levels

low. Possible root causes to think about here are past events of stock price manipulation that

have deterred investors from returning; lack of understanding of how the stock market works

and the investment risks that it carries, which in turn has pushed Filipinos toward safer channels

such as bank deposits, and in worst cases, even led them to spurious investment vehicles that

promise high levels of return only to eventually run away with the investors’ money; or the lack

of products in the stock market that in turn do not really offer a lot of options to invest in.

The more recent data, however, has shown us that there could be a possibility for a

monumental change in the way people invest and save. Information these days are becoming

easier to look for through the internet, and this aids in reducing the uneven access to

information that markets usually encounter. Schools also offer stock market topics now and the

Commission on Higher Education has gone a step further by implementing CHED Memorandum

No. 39, which institutionalizes a capital markets subject for all students taking a business

administration major. As Filipinos and even foreign investors become more educated and aware

of the opportunities and risks in investing in the Philippines, the overall market maturity should

rise along with them. However, further development in the stock market still lacks a clear

indication of whether it can move much faster, if it is to catch up with its regional peers. In this

sense, the stock market could indeed be representative of the country’s economy, which has

been left behind, though hopefully now on track towards achieving not just higher but more

sustainable growth.

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REFERENCES

BSP Department of Economic Statistics. Consumer Finance Survey 2009. Bangko Sentral

ng Pilipinas. www.bsp.gov.ph Hawksworth, J. and Teh, Y. 2013. Are stock markets reliable leading indicators of the real

economy for the US and UK? PriceWaterhouseCoopers Economics Consulting Services.

Larrain, B. 2005. Stock Market Development and Cross-Country Differences in Relative

Prices. Pontificia Universidad Católica de Chile. Levine, R. and Zervos, S. 1996. Stock Market Development and Long-Run Growth. The

World Bank Economic Review, Vol. 10, No. 2. Mohtadi, H. and Agarwal, S. 1998. Stock Market Development and Economic Growth:

Evidence from Developing Countries. The Philippine Star. “Merrill Lynch still top broker in RP”. June 7, 2001.

http://www.philstar.com/business/86337/merrill-lynch-still-top-broker-rp The Philippine Stock Exchange, Inc. www.pse.com.ph

http://www.philstar.com/business/86337/merrill-lynch-still-top-broker-rp