Philippine Markets Newsletter

MONDAY MACRO: U.S. Presidential election result and COVID-19 vaccine update lift the PH stock market, investor sentiment is showing a positive signal

November 16, 2020

Investors are now more bullish than ever since the implementation of lockdowns in mid-March this year. The Philippine Stock Exchange Index (PSEi) ended last week at 6,970, a 4.3% increase from two weeks ago. Before Typhoon Ulysses hit the Philippines last Wednesday, the index had just breached the 7,000 level.

The improved performance of the local stock market can largely be attributed to the U.S. Presidential election making global headlines. As the world’s largest economy, the changes in U.S. trade policies and the health of its economy affect global markets, making international investors also pay attention to this historical U.S. event.

In one of our Investor Essential Dailies, through analyzing the equity allocation survey, we found that investor sentiment in the U.S. amidst the global pandemic has calmed down as panic selling subsided after falling sharply in September.

Applying this similar metric to the Philippine stock market, we use this metric to reveal what is currently happening.

Below, we also provide some insights in how this U.S. election impacts the Philippines.

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On November 7, 2020, Joe Biden won the majority of electoral votes, hindering President Donald Trump’s plans to stay in office for a second term.

Although President Trump has yet to concede the election, calling for recounts and filing numerous lawsuits, Biden will likely take over the office in 2021.

Even though both Joe Biden and Donald Trump have inward-looking growth strategies for the U.S. economy, Joe Biden has less of a protectionist stance than the current President. Protectionism is the economic policy that focuses on improving the economy by restricting international trade to reduce competition outside the domestic market.

The next administration is likely to be more open to improving global economic partnerships and to immigration. This means a Biden presidency is less likely to threaten the future of globalization.

Globalization is important to emerging countries such as the Philippines because it allows easier access to international capital. It also attracts more production volume demands that will help spur the economy.

Under the Biden administration, investors’ concerns on U.S.-China trade will likely subside. His advisers have announced that Biden will have a more systematic approach with regard to the trade conflict instigated by the Trump administration. This includes the consultation with its U.S. allies before making a final decision on the U.S. tariffs on Chinese goods.

Another way the Biden presidency is favorable for the Philippines is in immigration. One of Biden’s promises is the reversal of immigration policies put into place by Donald Trump.

According to an article by New York Times, during the term of President Trump, annual immigration into the United States between 2016-2019 fell to 600,000, almost half of its historical annual numbers.

The current highly restrictive immigration measure is detrimental to Filipinos looking for career opportunities abroad. The United States remains one of the largest sources of remittances, and as of August 2020, cumulative total cash remittances from the U.S. is at 40.2%. If you recall, OFW remittances accounted for 9.3% of Philippine GDP in 2019, and in the past decade, about 9.7%. These remittances were also a major reason why the Philippine economy did not enter into a recession when the rest of the world did during the Global Recession.

The Philippine stock market viewed the results of the U.S. presidential election positively, recovering and hitting the 7,000 level on November 10, 2020. The correlation index is showing where investors are flowing money into.

As a refresher, the correlation index gauges investor sentiment by showing how similarly the stock index and its constituents move.

A high correlation index value means investors are less concerned about risks of individual stocks than they are of the overall market risk. Investors may be staying on the sidelines or buying or selling the blue chip stocks as a whole. On the other hand, a lower index value means investors are engaging in more stock picking strategies in some of its constituents that causes a diverge in movements from the stock index.

As we discussed previously, this index reached a record high of 77.3% in mid-March as investors expect the lockdown implementations to hinder economic activities in the country. This caused a massive market sell-off that resulted in the index falling by 13.3% following a two-day trading halt due to the lockdown announcement. The correlation index since then has been highly volatile relative to what we have seen in recent years.

The index slowly declined to around historical average levels in September, signaling that investors are now making more stock picking decisions. This may largely be attributed to the fact that the market has substantially fallen and has fully taken into account the COVID-19 economic repercussions.

This downward trend, however, was broken on October 23, 2020. When the PSEi significantly improved these past two weeks, the correlation index also began rising. Investors are now buying into the blue chips, signaling more positive investor sentiment for the market as a whole. The regained optimism in the market was due to the U.S. election.

Besides the election results, there is also positive news in the COVID-19 front that helped the index breach the 7,000 level since the pandemic began.

Pfizer reported that the vaccine they are creating for COVID-19 has an efficacy rate of above 90%. In other words, 90% of its volunteers did not show signs of COVID-19 symptoms compared to a placebo used in the vaccine trials as the benchmark for new vaccines.

Further progress on this front means the vaccine could be cleared by mid-December, and possibly be available to the masses by the first quarter of 2021.

The biggest concerns investors have had for the year seem to have subsided. A working vaccine is likely going to help spur both domestic and international business activities, leading to economic growth. Global trade risks have also become less of a concern with the next U.S. administration.

Finally, in the Philippines, with favorable demographics, a low interest rate environment, and infrastructure pipeline, the country can start capitalizing on these factors once more to become one of the economic stars in Southeast Asia.

About the Philippine Market Daily
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Daily
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