Asia stockmarkets the past year

Stockmarkets, one year. PH, ID, TH and MY, respectively. Is PDu30 inspiring to business or not? Data from http://markets.wsj.com/asia

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CN’s Shanghai, Shenzhen, HK, TW, respectively. Stocks sentiment in PH seems similar with CN. Could be one reason why Du30 loves

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SG, JP, KR and IN, respectively. In these 11 economies, PH and CN are the laggards for the past 12 months.

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Investors see political and business instability in both CN and PH. Instability in the leadership of Xi and Du30, distrust in the lack of rule of law in these two countries.

US and China stockmarkets, huge divergence

One year until yesterday, US vs China stocks, below.

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What does this mean: that global investors have rising trust of the US economy but flat or rising distrust of the China economy? More trust in Trump policies but less trust in Xi policies?

I checked CNN and BBC’s business sections, seems they did not make any report of this. NYT has one. https://www.nytimes.com/…/19reuters-usa-stocks.html

CNN, BBC, NYT, others are among the top anti-Trump media outlets.

The report says it’s the tech and health companies that were the main attractors,  http://www.foxbusiness.com/…/wall-st-hits-record-highs

Then there’s this news, “Oil falls to seven-month low on more signs of growing crude glut.” This could mean that US shale producers are gaining the upperhand over OPEC countries, so back to low world oil prices. I’m waiting for sustained below $40/barrel in the coming few weeks or months. http://www.foxbusiness.com/…/oil-falls-to-seven-month

I checked Hong Kong’s Hang Seng index, while the China stocks are declining, HK’s are rising, faster than the growth in US stocks actually.

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I am a non-finance guy so I asked several friends about this development, including my friend in HK, Andrew S. if this means that there is a growing divergence in investor trust between the economies of the mainland and the HK SAR.

Andrew offered a different perspective. He said that “Of the 10 biggest companies that make up the hang Seng index.  Probably less than 5% of their combined revenue/profit comes from Hong Kong.  The Hang Seng Index is of zero value as a reflection of HK’s economy.”

I’m inclined to believe that the HK stock market has a positive, non-zero value to the overall HK economy because there is more rule of law, more policy stability in HK market than say, the PH or TH or ID or MY markets.

Mr. Trump has been making plenty of economic, fiscal, energy policies that almost reverse the 8-yrs policies of Mr. Obama. I am curious if Trump’s policies were factored in positively by investors in the US stock market. Like the recent decline in world oil prices as reflection that Trump’s energy policies are doing positively for the US. Shale oil frackers, coal producers, they are improving. And manufacturing, transport firms that are energy-intensive like airlines.

From a WSJ oped last week, June 15:

“Remember the “energy independence” preoccupation of not so long ago? The U.S. is now emerging as the world’s energy superpower and U.S. oil and gas exports are rebalancing global markets. More remarkable still, this dominance was achieved by private U.S. investment, innovation and trade—not Washington central planning.

Thanks largely to the domestic hydraulic fracturing revolution, the U.S. has been the world’s top natural gas producer since 2009, passing Russia, and the top producer of oil and petroleum hydrocarbons since 2014, passing Saudi Arabia.

Trump’s reversal of Obama energy policies is a big contributor to this. More shale gas and oil, more coal, production and exports. To surpass Russia in gas production and surpass Saudi Arabia in oil production is one big achievement.

From the reports, biggest gainers yesterday were some pharma firms since Trump is trying to get rid of Obamacare. Like United Health Group, up 14.5% since Nov 6 2016.

Meanwhile, China’s market is “very very expensive for a long while” according to another friend, Peter A. This means the bubble is slowly crashing already? Hard to predict because China’s communist government will never allow Freedom of information, will hide the real data.

More globalization means more mobility of capital, labor and technology to markets worldwide that have more rule of law.

Asian stock markets and governments

When I posted my paper on the stockmarket in my fb wall, some anarchists and Duterte supporters came attacking it. Among their whines and complaints:

  1. Less than 1% of the PH population invest on it or are even aware of it, the average person doesn’t understand it nor does he feel the economic gains.
  1. Stock market is a hit and run investment. It is a poker game. The health of poker game does not represent the overall health of economy.
  1. The stock market is dominated by oligarchs who are protected from competition, you sink your money into it and the stock market will appear robust.

One may reason out those things but my paper simply compared the PH numbers with other Asian countries over the last 5, 10 years. The comparison with Du30 admin is only a side note because Thailand, other Asian economies that performed well over the past decade were able to sustain the upward movement of their stock market capitalization, the PH did not, most notably starting August 2016, went to the negative territory.

If PH stocks market expanded by only 1.5x after 10 years, there will be lots of noise and complains, that the oligarchs have prevented further devt of the local stock market. If it expanded 4x or more, the noise and complaints are still there. Perhaps if it expanded 8x, the noise and complaints will be even louder. Cool.

I  also there, “global capitalism is generally more generous to emerging economies like China, the Philippines, and Vietnam. Their previously highly repressed financial sector when liberalized has posted fast growth and expansion in a short period as one decade.” Still no credit to global capitalism, perhaps people wait for global socialism to advance?

Hataw lang sila, for them, nothing is positive in this country. Cronyism or corruption or oligarchy or misery. cool. Contraction, zero growth, 4x growth, 10x growth, all the same. Pathetic minds.

Meanwhile, here’s the yearender stocks performance in the Asia Pacific. Four countries have fared poorly compared to their year-ago levels: China, Japan, Malaysia and PH.

stocksSource: http://markets.wsj.com/asia

China is reeling from various internal/domestic problems like huge public debt, many rebel regions. Japan continues to face its old problems including a big greying population, huge domestic public debt, political problems of PM Abe. Malaysia continues to reel from a big corruption scandal related to 1MDB.

The Philippines is still adjusting from its big mouth and always cursing President, thousands of murders related to “drugs war”, and so on. S. Korea is also facing a big corruption problem by President Park but somehow its corporate sector is able to shake away the political uncertainties.

Asian stock markets capitalization

* This is my article in BWEconomicForum last December 14, 2016.

The stock market is one of several indicators that show how an economy or a country is doing because it represents the inflow and outflow of investments, which are mainly driven by outlooks over the short and medium terms. It is also an indicator of how the rule of law is respected or trampled by a government in power.

During the BusinessWorld-PAL ASEAN Regional Forum last Nov. 24 held at Conrad Hotel, SM MOA Complex, among the sessions tackled was “Unity in Diversity: A Political-Economic Outlook.” The speakers were Department of Budget and Management (DBM) Secretary Benjamin E. Diokno, Asian Development Bank (ADB) Country Economist Aekapol Chiongvilaivan, and McKinsey Managing Partner Suraj Moraje, and Philippine Stock Exchange (PSE) President and CEO, Hans B. Sicat.

Mr. Sicat said that year to date (ytd), there has been net foreign buying of P17.6 billion or $373.6 million.

But in the period from Aug. 23 to Sept. 23 or one month straight, there was sustained net foreign sell off. The peso-dollar exchange rate also experienced significant depreciation from mid-September, touching the P47-to-a-dollar level and never looked back until it reached the near P50 level in late November.

This is bad news because the PSE was among the best performing stock markets in the region over the past decade.


The table shows the following:

One, in terms of expansion of stock market values in just one decade from 2005 to 2015, the best performing was China, which expanded by more than 20 times, the Philippines with more than six times, Vietnam with five and a half times, and Indonesia with 4.3 times.

Two
, in terms of stock market capitalization as percent of gross domestic product in 2015, first is Hong Kong, second is Singapore, third and fourth are Taiwan and Malaysia.
And three, global capitalism is generally more generous to emerging economies like China, the Philippines, and Vietnam. Their previously highly repressed financial sector when liberalized has posted fast growth and expansion in a short period as one decade.
Let us now check another piece of data, the annual growth rate of stock markets of the same countries and economies over the past six years.
Meanwhile, we also need to recognize several facts:

One
, the Philippines has the best performing stock market in the Asia Pacific over the past six years. Despite its warts and problems, the past administration has done something that really improved business confidence in the country.

Two
, China, Taiwan, Singapore, and Vietnam have experienced roller-coaster rides in their equities markets.

Three
, this year, though, especially the second half of the year, is particularly bad for the Philippines, from the best performing to badly performing over the past few months.
It seems the current administration in the Philippines is reversing the business confidence built over the past six years.
The new President’s disrespectful, crass, and vulgar assertions with his frequent “kill, murder, shoot” pronouncements could have contributed to the possible reversal in business confidence, at least in the stock market.

A more civilized President, an anti-drugs war with sufficient respect for human rights of the accused, an explicit disavowal of possible declaration of Martial Law and suspension of the writ of habeas corpus, and a business environment conducive to investors is badly needed.

Bienvenido S. Oplas, Jr. is the head of Minimal Government Thinkers and a SEANET Fellow.

Capital liberalization and stockmarket growth in Asia

The ADB released its “Key Indicators for Asia and the Pacific 2016” report nearly two weeks ago. I found these data interesting. These tables are cropped, I removed other countries and years to focus on these important economies in the region.

This is a good summary why the PH and TH, CN, JP and NZ, were among the best performing economies in stock market until last year.

Another group of economies have maintained their high levels of stocks capitalization but in terms of growth and % share of GDP, they performed badly: SK, TW, ID, MY, SG and AU.

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In terms of growth rates, overall there was fast recovery in 2010 for many economies after the global financial turmoil of 2008-09, then they tanked somehow. The PH and TH stocks’ double-digit growth however, were sustained until 2013.

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On interest rates, PH T-bill rates declined significantly, from almost 10% in 2000 to only 1.7% in 2015. Lending rates were also down, only 5+% for many economies.

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These data show that capital liberalization pays off. Even in period of global financial squeezes, it is not wise for governments and central bankers to resort to capital controls because this will further squeeze and scare those investments that are still in the economy or planning to enter the economy. Capital dips and recoveries, investments up and down, are 100% part of the DNA of capital. Allow and protect, respect them. Soon they will come and stay for the long haul.

China’s stock market and central planning

bw2* This is my article in BusinessWorld Weekender yesterday.

HIGH DEBT, private and public, will always create financial turmoil, today or tomorrow. The ongoing fiscal drama in heavily indebted Greece will continue for many months to come, whether it will stay using the Euro or not. And recently, it was China’s turn with the recent near-crash of its stock markets in Shanghai and Shenzen, and partially affecting the markets in Hong Kong.

Unlike the markets in the US, Japan, UK, Germany and other democratic countries, the case of China will always be internally conflicting. It is a dictatorship that abhors political competition and yet it wants to mimic economies that allow market competition.

HIGH PUBLIC DEBT

Officially, China has a gross public debt/GDP ratio of only 41% in 2014, manageable and just slightly higher than the debt/GDP ratio of Taiwan and South Korea (38% and 36%, respectively). But China has more debt than what it will officially admit.

A report by McKinsey Global Institute recently said that China’s total borrowings (individuals + companies + local and central governments + state enterprises) was 282% of GDP in 2014. This is very high for a non-industrialized economy like China.

There is high-margin lending (borrowed funds for stocks investment), reaching $323 billion last month alone, invested in the stock market by many novice, first-time stock investors numbering in tens of thousands.

STOCK MARKET BUBBLE

From 2010-2014, China’s stock market capitalization/GDP ratio averaged only about 45%. By June 12 this year, it rose to almost 100%, showing a huge asset price bubble in the first half of this year.

In comparison, this ratio is mildly increasing in the US (around 140% in 2014) and Japan (nearly 100% in 2014) from 2011 up to the present.

Figure 1 (from Bloomberg)

150716WeekEnder_GDP••

The bubble started last year when government media repeatedly announced that stocks were cheap, with the implicit understanding that the central planning authorities can control prices from falling. Millions of novice and first-time stock investors came in droves, China’s market capitalization tripled and reached $9.8 trillion, according to a Bloomberg report last June 30.

From 2011 to mid-2014, Shanghai’s price-to-earnings (P/E) ratio was only around 12. By late 2014-mid-2015, this rose to 26, more than double in less than one year.

BUBBLE CRASHED

Why did the bubble burst so suddenly? There are several explanations and hypotheses for this.

One is that China is experiencing a GDP growth slowdown of “only” 7% or less, compared to 9-12% per year for the last three decades or more. Two, some government stimulus programs to shield China from various global turmoil have to end. Three, finance also follows the law of gravity: the speed and height of price rise is somehow directly proportional to the speed and depth of price decline.

The magnitude of the stock price decline was $3.9 trillion, according to the Bloomberg China Market Cap index. That was equivalent to the GDP size of Germany, larger than the GDP sizes of UK or France or Brazil, and twice the GDP of Russia.

Print

The bulk of China stock investors are the more than 90 million individuals who make up about 80% of the market, according to a survey of households.

The stocks crash was worse than the US property crisis in 2008-09, although in terms of global interconnection and contagion, the US financial turmoil last decade had a larger impact. Significant deterioration in the public debt of Greece, Spain, Portugal, Ireland, Cyprus, Italy, etc. occurred in 2009 and 2010, obviously a result of contagion from the US.

Compared to the Greece debt problem, this is much larger. Greece’s GDP size in 2014 was only $238 billion, and its total public debt was about $320 billion.

CENTRAL PLANNING FIGHTS BACK

China’s government responded with several measures. One, the central bank cut interest rates, hoping that more savings from the banks will go to the stocks market. Two, some stock traders and speculators were investigated with threats of prosecution for stock rumor mongering. Three, a number of planned initial public offerings (IPOs) were suspended. Four, outright stop in trading.

From Bloomberg reports:

“At least 1,301 companies have halted trading on mainland Chinese exchanges, locking up $2.6 trillion of shares, or about 40 percent of China’s market capitalization. The China Financial Futures Exchange raised margin requirements for sell orders on CSI 500 index futures, while the central bank will provide “ample liquidity” to the stock market. China Securities Finance Corp. said it will buy more shares of small- and mid-cap companies.” (July 8)

“Official measures to support shares became more extreme during the week as declines deepened. They include a ban on stockholders and executives from selling stakes in listed companies for six months, an order for companies to buy equities and an investigation by the nation’s public security bureau into short-selling.” (July 10)

LESSONS FOR SOUTHEAST ASIA

Emerging economies in the region like the Philippines can draw lessons from this latest episode in regional and global economics.

1 Moral hazards. When a central planning government rallied the public to invest in the market, many investors with little or zero experience in the market came believing they couldn’t lose money since the government is big enough to guarantee returns or bail them out later.

2 Adverse selection. Millions of new novice investors have picked up the wrong timing, at a time when fiscal uncertainty hounds the EU and China was experiencing growth slowdown. Adverse selection often results in adverse results.

3 Debts and uncertainty. As public and private debts become bigger and bigger, the economic uncertainty also becomes bigger. People will never know who can pay back and when, and who will default.

4 Corporate fundamentals. Investors should do hard analyses of the fundamentals of companies whose stocks they are buying, and not just wait for cues and pronouncements from government. It can be a case where as government intervenes more, it creates more panic and price volatility.

5 Central planning and central disappointment. Central planning cannot and will not cure and control everything, including stock price ups and downs, boom and bust. Central planning works mainly to postpone small busts to become huge busts and bursts. Authoritarianism can never be compatible with free markets.

6 Role of government. The state and its various agencies, from local governments to different regulatory agencies to monetary authorities, should focus on ensuring fair market rules rather than guaranteeing outcomes.

Bienvenido S. Oplas, Jr. heads a free market think tank in Manila, Minimal Government Thinkers, Inc., and is also a fellow of South East Asia Network for Development (SEANET), a regional center based in Kuala Lumpur advocating economic freedom in the region.