The holiday blues
Credit to Author: RONALD S. GOSECO| Date: Thu, 17 Jan 2019 16:17:13 +0000
The much anticipated Santa Claus rally in the December stock markets fizzled out. A big chunk of the losses came during a violent December that saw the US indexes dropping around 9 percent for the month and affecting all markets globally including the Philippines which dropped 12.8 percent. The Dow and the S&P 500 recorded their worst December performance since the global recession of 1931 and their biggest monthly loss since the global financial crisis of 2008.
There were reports that the recent tumult in the US financial markets in December was triggered by automated trading. Investors have increasingly turned to automated trading programmed to render instantaneous buy or sell orders based on economic data or algorithmic functions that exacerbate succeeding trades. According to a CNBC report, computer models now account for 28 percent of overall volumes.
These automated trading platforms have a tendency to behave with herd-like behavior because these are engineered and programmed similarly. The proliferation of exchanges where stocks are automated to be bought and sold can also result in limited liquidity on these platforms. These make these markets vulnerable to instantaneous volatility. This automation might have significantly contributed to the massive losses that originated from the US market and which eventually spilled over to the rest of the world. The other contributors were fundamental economic concerns that put pressure on the markets. These were the fears of a global economic slowdown and the possibility that the US Federal Reserve might make a monetary policy error. Concerns over the on-going trade negotiations between China and the US also dampened market sentiments.
2018 will be remembered as the worst year for the Philippine stock market since the global financial crisis of 2008 when it slumped by 48 percent. Since then, the Philippine Stock Exchange Index (PSEI) had climbed in most years except for 2015 and 2016. The major concern for the Philippine market last year had been the surge in inflation. These inflation concerns also led to the weakening of the peso which became a disincentive to foreign investors.
It appears though that the markets have become rational again, possibly because humans have taken over the computer trading platforms. As of the second week of January, the US stock market has performed well with the indexes up by around 3 percent. While the US government shutdown reached its third week, positive developments on the trade negotiations with China seem to be taking shape. Further, officials of the US Federal Reserve said the central bank would be cautious while hiking interest rates.
The PSEI breached 8,000 recently as foreign buyers net purchases turned positive. The Philippine market is now Asia’s best performer. The mood was tempered recently with the recent bankruptcy of Hanjin which filed for corporate rehabilitation. Five local banks including RCBC, BDO, BPI, Metro Bank and Land Bank need to address a $412-million debt exposure. This could affect the local market. An interesting development is the report that the Philippine government is supporting Hanjin to get back on its feet by helping to vet two potential Chinese state owned shipbuilders who could take over the operations of Hanjin. This issue brought together two unlikely bedfellows who oppose the possible takeover of these so-called white knights because of security reasons. One of these groups is Nagkaisa, which is a coalition of 40 labor groups and a group headed by a former navy flag officer in command, Vice Admiral Alex Pama, who warned that “Chinese ownership of Hanjin’s shipyard will give unlimited access to one of the Philippines most strategic geographic naval and maritime asset.”
These recent developments both locally and globally will determine whether or not the recession and the cyclical market downturn could still be averted for a while longer.
Ronald Goseco is currently a trustee of the Finex Foundation
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