Turbulent times

Financial markets worldwide have exhibited extremely erratic behavior in the past two weeks. Locally, the stock market posted last Thursday its worst performance since the subprime crisis in 2008. The peso was similarly battered, falling from a high of 40.83 to a dollar to breach the P43:$1 mark (many analysts and economists had predicted the opposite). The local bourse hit its lowest level this year. The benchmark Philippine Stock Exchange index plunged 442.57 points (or 6.75 percent) in just a day last Thursday to 6,114.08. It was the biggest single-day loss since Oct. 27, 2008, when the local price barometer tumbled 12.27 percent just a month after investment banking giant Lehman Brothers collapsed, triggering the world’s worst financial crisis since the Great Depression at the end of the 1920s.

With the benefit of hindsight, analysts said the market had risen too fast and too soon. The PSEi peaked at 7,403.65 last May 15, a level earlier forecast to be hit by 2014. As a stockbrokerage pointed out earlier, “valuations have become a concern due to positive sentiment that drove market levels to yearend expectations all by the first quarter of the year, outperforming most global markets.” The market’s bull run began in early 2009. So far, the PSEi has retreated by nearly 15 percent from that peak in May. A pullback exceeding 20 percent is usually interpreted as a reversal of the trend to a bear market. But since the start of the year, the index is still ahead by about 8 percent.

The downturn is not peculiar to the Philippines. Also last Thursday, stock markets in Asia fell heavily, with prices in Bangkok and Jakarta mirroring a plunge of 6.35 percent on the Tokyo bourse, bringing Japan’s key stock index down more than 20 percent from its recent peak.

The reason for the global uneasiness is the speculation that the US Federal Reserve Board will scale back its easy-money or low-interest rate policy. Last May 22, Fed Chair Ben Bernanke told the US Congress that the Fed might scale back stimulus efforts if the US employment outlook continued to improve.

The Fed has been buying bonds to push down market interest rates to near-zero levels. Theoretically, low interest rates should spur lending to productive activities that, in turn, should lift the overall economy. The Fed does this by injecting liquidity into the system through the purchase of $85 billion worth of securities a month. Speculation that the Fed may wind down this stimulus—and consequently lead interest rates higher—has led fund managers to dump emerging-market stocks and buy US assets. For instance, foreigners were net sellers at the local bourse last Thursday by P1.65 billion. This was the same picture in emerging markets from Asia to South America.

As foreign investors exchange the proceeds from the sale of their emerging-market stocks to dollars, demand for the greenback rises, thus leading to its appreciation. This is why the peso and other currencies have lately been depreciating in value. A rising dollar and higher US interest rates have adverse effects on developing economies in terms of capital flight. In fact, monetary authorities of countries like Indonesia have raised their domestic interest rates to stem the outflow of capital.

Top Fed officials are meeting this week in Washington to assess the state of the US economy and tackle interest rates and other policies. Most economists expect US interest rates to remain steady. Bernanke was reported as saying that the Fed would continue efforts to stimulate the economy until further improvements in the unemployment situation. Last week’s US jobs data provided some calming effect on global markets as these suggested that a recovery in the world’s biggest economy was not strong enough. This was behind the weakening of the dollar last Friday after gaining much of the week.

Volatile events in financial markets like the one seen this June are usually temporary. In the longer term, economic fundamentals determine the path that the country will take. Economists and market analysts agree that the Philippines has strong economic fundamentals—billions of dollars in remittances from overseas Filipinos, an improved fiscal position of the national government, huge foreign reserves of almost $85 billion against total long-term liabilities of $35 billion, and a low inflation that gives room for accelerated public and private spending. Growth will thus rely on domestic demand and consumption. Meanwhile, these are turbulent times for financial markets. The Philippines and other emerging economies just need to brace themselves for a very rough ride ahead.