The Philippine Stock Exchange Index (PSEi) closed the year 2018 at down 14.63%.  This marked the index falling from 8,558.42 points (end of 2017) to the 2018 year-end close of 7,466.02 points.  A huge turn-around from the preceding year’s gains of about 25%. There are several reasons behind the sluggishness of the market despite the optimistic outlook on the economy. Here are some of them:  

Inflation – Market’s Concern

From an average of about 3% inflation in 2017, year 2018 started with a 3.2% inflation and steadily rose to a high of about 6.7%, a nine-year high. This indicator somehow spooked the market with some analyst surmising an over-heating economy. This hardly ever happened in the past when opening inflation rate for the year nearly doubled in three quarters. With inflation showing and accelerating, traders and investors expect an increase in interest rates from policy makers. Generally, the increase in interest rates are considered more bad than good over the short term. It could erode corporate profits and slow down consumer spending.

Monetary Policy – A Disappointment

The market participants expected the possible interest rate increase due to the inflationary effects of the implementation of new tax laws, plus the brewing inflation figures carried over from the previous year. Disappointment, however, got into the market as policymakers delayed their reaction. The first movement of interest rates happened in May 2018, for a mere 25 bps.  Four more moves were implemented in the following months. Somehow the remaining two months of 2018 showed slower inflation figures, which ended the slide of the equity market. 

Oil – Additional Stress

Exacerbating the inflation scenario, world oil prices for 2018 moved higher from a start of US$ 66 per barrel in January 2018 to about US$ 85 by October. This moved in simultaneous fashion with our own inflation figures. 

With the slowing inflation figures as a backdrop of the market over the past two months, the stock index—PSEi—has moved quite significantly from its lows. 

Foreign Investors and Forex – The Connection

As the market was hounded with uncertainties and seemingly worsening scenario, foreign funds took the exit gates and pocketed some profits. A move that reflected in the movement of the peso dollar exchange rate moving past 50 for the first time and setting a record low of about 54 is to 1 green back.

Economy – Still robust?

All eyes were on the performance of the economy thru its GDP numbers that came in strong on the 1st quarter at 6.8% but later on turned lower in the succeeding months to 6% and 6.1% respectively. This three quarter average marked an average growth of 6.3%, is way below the expectations prompting some foreign analysts to lower the full year GDP numbers by few basis points. The last quarter GDP figure will come in latter January to complete the 2018 picture.  

2019 – The scenario

With the slowing inflation figures as a backdrop of the market over the past two months, the stock index—PSEi—has moved quite significantly from its lows of 6,800 points. At current price of about 8,000 points, the growth is about 17%. The 11% were in the last two months of 2018 while 6% has been the growth so far this year. With the growth figures on the extreme the past two years, 2019 should provide the equilibrium to this matter by growing on a double digit pace. With government spending trend continuously growing, par capita income rising, and investments remaining buoyant, the 2019 outlook should be a lot better than 2018.  The exchange rate should likewise recover lost ground as do the equity index.  We should see some funds coming back as stock valuation becomes attractive with a cheaper peso.  Potentially, the GDP figures will retain its pace of growth.