Why the stock market is up, IMHO (part 1)By Randell Tiongson on August 12th, 2009
I went with my friend Chinkee Tan as he gave a talk for Avida sales people in the historic old Makati Stock Exchange Tower. The trip made me think about what’s going on the market right now.
So what’s happening? Let me discuss my thoughts. Firstly, the Philippine equities market is largely dependent on what’s happening in the US. We can see that the stock markets are not really decoupled from the US so the saying still holds that when “the US sneezes, the whole world catches a cold.” That also works the other way, when the US markets are up, other markets, particularly the local market will also be up. If this is the case, let’s look at what’s happening to the US today.
The US is still in recession. US economy is experiencing economic contraction that has not been seen in many years. Productivity is down and profits are down. Ideally stock values are dependent on what’s going on in the economy and the companies it represents. When the economy is bullish, it will result to industries making more profits and disposable income will likewise increase – making more money to spend and to invest which further fuels economic activity. Those indicators will have a positive effect on investments and the most sensitive of them will be the stock market. Well, at least in theory.
This is not the case in the US markets today. If you look at all indicators, the market should not be going up. US economic managers are quick to declare the markets have bottomed out and it’s now well on its way to recovery. Really??? The US Government’s stimulus package has yet to see any real positive effect to the US economy. To this date, macroeconomic indices will point towards the fact the US Economy is in really bad shape – ergo, the market should likewise be in bad shape. Toink! Not so.
Markets have made a recovery in the US and locally. It is still far from where it was prior to the financial crisis but it has made some decent gains. The big question is why? I am not an analyst and I can’t say I have the right answers but I can offer you what I think why… hence, my quid pro quo in my blog title: IMHO – In My Honest Opinion.
Firstly, there is excess liquidity in the market today. Because of fears of losing money, people have held on to their cash ever since the whole financial crisis started to erupt. The joke back then was they changed the meaning of ROC – from Return ON Capital, it became Return OF Capital, not a funny joke actually. Because of credit risks, people and institutions are not lending money as much as they should resulting to a lot of people having cash to invest, making the market very liquid. Excess liquidity does not mean that people will be investing, but it does not also mean that people will totally stop investing (most will wait for the economy to recover). People and institutions who manage investments will need to put money into work and for some time now, the action in financial investments is largely towards the safer instruments such as government securities and other fixed income securities. While the risk in such instruments will be lower, the yields are also very low – too low that you can’t really see real growth in your investments. Yields of such instruments are largely dictated by their price; and price is dictated by the laws of demand and supply.
Catch Part 2… soon!