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ABSTRACT
The Philippine stock market is one of the earliest exchanges established in Asia
and has a rich history of events that have contributed to its development. It is also
considered as a barometer of future economic performance, and for years has served its
primary functions of facilitating the dual role of capital raising for companies and trading
of shares by investors. The paper takes an in-depth look at available historical data since
the unification of the previous two stock exchanges. The time series information provides
insights on the development of the stock market, and how some of its characteristics
persist while some are undergoing gradual changes. Finally, the paper examines several
studies that suggest the stock markets relationship to economic growth and presents
cross-country stock market development ratios that can serve as jump-off points for
1
further examination and study.
I.
The first stock exchange in the Philippines was set up on 08 August 1927 during the
American colonial period as the Manila Stock Exchange, Inc. (MSE). Operations ceased during
the Japanese occupation and resumed in 1946 after Japans surrender in 1945. As of 25
January 1946, only fourteen (14) companies were listed in the MSE, divided in the following
sectors: Banks, Sugars, Commercial and Industrials, Insurance, and Mining. There were thirtythree (33) brokers on record, twenty (20) of which were active as of October 1947.
On 27 May 1963, the Makati Stock Exchange, Inc. (MkSE) was organized. The MkSE
started operations on 16 November 1965. Eighteen (18) companies were listed in the MkSE on
its first day of operations, sixteen (16) of which were also listed in the MSE. In 1973, a
Presidential Decree was passed, ruling automatic listing in both exchanges of securities that
have been approved for listing and trading. Two years later, the Securities and Exchange
Commission (SEC) implemented uniformity of price fluctuations, board lots and trading symbols
The authors are all employees of The Philippine Stock Exchange, Inc. Ms. Crisostomo and Mr. Visda are part of the Corporate
Planning and Research Department (CPRD), while Ms. Padilla was previously a part of CPRD but now works for the Market
Education Department. The authors would like to acknowledge and thank former PSE President, Mr. Ernest Leung, for his invitation
and prodding for the team to produce this discussion paper, which aims to support Mr. Leungs advocacy of educating Filipinos
about the stock market. Any views or opinions, either defamatory or complimentary, are solely those of the authors and do not
necessarily represent those of the PSE. The PSE together with its affiliates and subsidiaries will not accept any liability arising from
the consequences of, and any actions or decisions made in respect to any statements expressed henceforth.
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in both the MSE and MkSE. Composite indices were introduced in MkSE and MSE in 1978 and
1986, respectively, in order to measure market movement.
The Philippine Stock Exchange, Inc. (PSE) was incorporated on 14 July 1992, in
anticipation of the unification of MSE and MkSE. The one price-one market exchange was
achieved through the link-up of the two existing trading floors on 25 March 1994. Overall, there
were 189 listed companies with a total market capitalization of Php1.39 trillion, volume of shares
traded of 704.27 billion, and value turnover of Php364.30 billion.
In 2006, to accommodate the growing diversity of listed companies in the Exchange and
provide better sector comparables, the industry classification of listed companies was revised
and companies were classified according to their major source of revenue, instead of the
primary purpose stated in their articles of incorporation. The six sectors currently being used
were established, namely, Financials, Industrials, Holding Firms, Property, Services, and Mining
& Oil.
Whole day trading was implemented on the first trading day of 2012, starting at 9:30am,
with a recess at 12nn to 1:30pm, and closing at 3:30pm. This aimed to align the Exchanges
trading hours with other Asian exchanges, and to increase market liquidity by opening up
trading in the PSE to markets in other time zones. During the said year, the PSEi hit 38 record
highs (45 intraday), at a peak of 5,832.83 on 26 December 2012. The PSEi closed at 5,812.73
at the end of 2012; there were 254 listed companies, 234 of which were traded during the year.
Total market capitalization was at Php10.93 trillion, volume traded was 1.04 trillion, and value
turnover was Php1.77 trillion.
During the first eight months of 2013, the PSEi first surpassed the 7,000 mark on 22
April 2013 at 7,120.48. Thirty-one (31) record high instances for the PSEi closing levels have
been achieved, reaching its peak on 15 May 2013 at 7,392.20, a 27.2% increase from its 2012
closing level. Total value turnover as of end-August 2013 has also exceeded the full year value
turnover recorded last year, at Php1.78 trillion.
Figures 1 and 2 illustrate the growth of the PSE in the past 15 years. While the main
index PSEi grew to reflect increasing stock prices, market liquidity also expanded as measured
by total value turnover and trade frequency (number of trades). From less than 5,000 trades a
day during the bear period spanning the late 1990s and early 2000s, the market has now grown
to more than 30,000 trades a day. Aside from benefitting from positive developments in both the
local and international fronts, several factors also contributed to the expansion. These include
the upgrade to a new trading system that could easily handle a significantly higher volume of
trading, and the extension of trading hours to include an afternoon session. The strength of local
company fundamentals also had a big impact to increased interest in Philippine equities.
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Figure 1. Daily PSEi and Total Value Turnover (in million PhP)
Source of basic data: PSE; value turnover data truncated to Php15 billion
Figure 2. Daily PSEi and Frequency of Trades
Source of basic data: PSE; trade frequency data truncated to Php35 billion
It is also interesting to look at the difference over time in average value turnover per
trade in the market, as seen in Figure 3. The data range was narrowed down to value of trades
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up to Php100,000, as this is the interval where most of the trade frequencies occur. The results
show there has been a marked increase from 1998 to 2012 in the number of trades which are
valued lower. Specifically, trades that are valued at Php6,000 and lower have the biggest
frequency for 2012 compared to the largest frequency in 1998 which ranged from Php10,000 to
Php12,000. The comparison between 1998 and 2012 in terms of number of trades valued at
Php2,000 and below has also been staggering, perhaps supporting the perception that there are
more retail investors actively participating in the market today. It should be noted though that the
analysis made here did not consider year-to-year changes, and did not factor in market-moving
events that happened during these middle periods. This could be a subject for further analysis in
the future.
Figure 3. Frequency of Trades based on Value Traded, 1998 vs. 2012
350,000
300,000
250,000
Frequency 1998
Frequency
Frequency 2012
200,000
150,000
100,000
50,000
Page 5 of 21
Page 6 of 21
120,000.00
100,000.00
7,000.00
Follow on (Primary)
IPO (Secondary)
IPO (Primary)
6,000.00
5,000.00
80,000.00
4,000.00
60,000.00
3,000.00
40,000.00
2,000.00
20,000.00
1,000.00
the past five years, already account for 14.9 percent of the total investor accounts base a 10
percent jump from only 4.3 percent in 2008.
450,000
400,000
2008
2009
2010
2011
2012
No. of Accounts
Page 8 of 21
60 and Above
200,000
45 to 59
30 to 44
18 to 29
150,000
100,000
50,000
2009
2010
2011
2012
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
2009
2010
2011
2012
Regarding the location of investors indicated in Figure 7, it is not surprising to see that
majority of investors are situated in Metro Manila, the hub of economic activity in the country.
While the PSE has made efforts to reach out to areas outside of Metro Manila even
establishing a satellite office in Cebu in 2011 and conducting multiple roadshows in Cebu, Iloilo,
Cagayan de Oro and Davao the overall interest in stock market investing in these regions
remains largely untapped.
Figure 7. Retail Investors by Location, 2008-2012
120,000
100,000
80,000
Foreign
Mindanao
60,000
Visayas
Luzon
40,000
Metro Manila
20,000
2009
2010
2011
2012
the market continues to be too small to be able to absorb the high number of TPs, especially
with the Philippines larger counterpart exchanges in the region only holding an average of 4050 brokers.
The PSE is host to 111 local and 23 foreign TPs. Historically, the share of each group to
trading activity has fluctuated and largely depended on market conditions at certain points of
time. Figure 8 shows the distribution of total value turnover among local and foreign TPs since
1994. Local TP trading activity remained robust in 1994 up to 1999, even outpacing foreign TP
trading levels early on. However, the lingering effects of the 1997 Asian financial crisis
compounded by adverse political and economic conditions on the local front combined to create
a drag on trading activity and forced several brokers to suspend their operations. From 184 total
TPs, the number was reduced to 150 in 2001 and further declined to its current count of 134
brokers. While total trading activity also dropped significantly, the distribution between local and
foreign brokers became in favour of the foreign TPs from 2001 to 2004.
The support of local TPs to the market then started to pick up again in 2005 as concerns
on the overall health of the political and economic systems were slowly alleviated. Even with the
occurrence of the 2008 crisis, unlike in the early 2000s, local TPs have been able to maintain
their share of about 50% to total trading activity. As foreign funds have flowed into emerging
markets during the past 3 years, local TPs have matched this surge, which is an encouraging
sign for the sustainability of local brokerage houses over the long-term.
Figure 8. Value Turnover for Local and Foreign TPs, 1994-2012
Turnover
(in P bn)
Index
value
4,000
7,000
Local TP
3,500
6,000
Foreign TP
3,000
5,000
2,500
4,000
2,000
3,000
1,500
2,000
1,000
1,000
500
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
investment trust funds (0.4%). In NCR, 0.8% had invested in any of these financial instruments
while in AONCR, the percentage was negligible.
In the June 2009 survey of the Social Weather Stations, it reported that only 1.0% of the
Filipinos said that they own any stock. This is consistent with the number of investor accounts
opened in stockbrokerage firms, as earlier cited that approximately, only 1/2 of 1.0% of the
countrys population are stock market investors, which is equivalent to 525,850 accounts. This
number could be lower as there are some investors that have accounts in other brokers and
thus counted several times. This pales in comparison to the US, where a reported estimate of
50% of the population have investments in the stock market through various products that their
exchanges offer. Other countries in Asia such as Hong Kong, Malaysia and Singapore, also
have higher investor bases that represent 35.7%, 12.5% and 12.0% of their respective
populations. There is a possibility that the size of these countries economies, combined with the
higher level of sophistication and product diversity of their stock markets, have driven up their
investor participation.
On the other hand, retail investors in Thailand account for only 1.0% of the countrys
population, while Indonesias retail investors comprise about 0.15% of its population. In terms of
size of the economy, these two are closer peers of the Philippines. Indonesias lower investor
population ratio despite having a bigger economy could be attributed to also having an
enormous total population.
There are many factors that possibly explain why Philippines investing population is only
minute relative to the total population. One is that the prevalence of poverty in the country could
mean that those who do not have the funds to invest could not be expected to participate in the
stock market as investors. But if analysed further, assuming a population of 94 million, of which
20.4 million (or 21.5% based on BSP data) have accounts in a bank, the 500,000 accounts in
the stock market represent a mere 2.4% of the people with funds to invest in instruments (such
as shares of stock) other than basic deposits. If one is to be more specific, of the 21.5% banked
households (i.e., those with deposit accounts), only 60% had interest-bearing deposit accounts.
This further indicates that a significant number of deposit accounts had an average daily
balance below the required amount to earn interest or had earned a negligible amount of
interest. Assuming we only get the 60% of the total households with deposit accounts, since
only they have sufficient funds for investment by meeting the minimum required average daily
balance at the very least, there are still 11.7 million (95.9%) potential stock market investors but
have not gone to other non-bank deposit forms of investment, such as the stock market.
market, in particular, has found itself moving in step with the US market for the better part of its
existence, owing to the Philippine economys dependence on the worlds largest economy.
However, looking at about two decades worth of data from 1992-2013, it can be observed that
the two markets stock indices have moved in divergent paths at different points during the
period before again moving nearly parallel to one another. (Figure 9)
Figure 9. US (DJIA) and Philippine (PSEi) Stock Indexes
DJIA
PSEi
this period, with the PSEis current run-up being supported by the impressive economic growth
of the Philippines.
These two divergence points can be seen as markers that started or could potentially
start a shift in the Filipino investment paradigm. The first one, as mentioned, clouded the opinion
of many Filipinos about the stock market and, perhaps unfairly, magnified the risk involved in
investing in stocks. The declining interest from that point on can be seen in the ratio of local to
foreign trading activity, as local trading plummeted to 39.4 percent in 2003 and averaged 49.3
percent from 2001-2008, encompassing the market bull run and the succeeding global financial
crash. The absolute figures in Figure 11 also confirm this observation.
Figure 10. Local-Foreign Value Turnover Ratio, 1998-2012 (in %)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Aug
2013
Foreign Ratio
Local Ratio
Local TP
2,500
2,000
1,500
1,000
500
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Aug
2013
share at slightly above 50 percent. The earlier mentioned rise of online investors similarly gave
reason for the continued strength of local investment as seen in Figure 12, which shows that
more than half of the online retail investor population consist of young professionals and that
these online accounts are highly active (Figure 13). The market education efforts of the PSE
and its trading participants also helped develop a heightened awareness of the stock market to
a younger breed of investors that had a high risk tolerance.
Figure 12. Online Retail Investors by Age
Group (in %)
potential reason cited for this could be related to stock price increases triggering a short term
boost in consumer spending, which will then have an effect on the economy, boosting growth
and reducing unemployment. In the UK, however, the momentum effects had less of an impact
probably due to stock market effects in the jurisdiction operating slowly through business
investment rather than consumer spending as observed in the US.
Meanwhile, Levine and Zervos (2013) observed from cross-country regression results
that stock market development is positively associated with long-run economic growth. Using
pooled data coming from 41 countries during the period 1976-1993, the study analysed the
correlation between stock market and economic growth, which was measured by a number of
control variables such as initial income (logarithm of initial real per capita), initial education
(logarithm of the initial secondary school enrollment rate), a measure of political instability
(number of revolutions and coups), ratio of government consumption expenditures to GDP,
inflation rate, and black market exchange rate premium. On the other hand, overall stock
market development was approximated using a customized index, which included variables
such as market capitalization ratio, total value traded ratio, turnover ratio, and the International
Arbitrage Pricing Model used by Korajczyk (1996) to measure stock market integration.
Stock market development ratios
To better understand some of the ratios used by the Levine and Zervos paper,
descriptions and comparative data are provided. These ratios are used to indirectly measure the
development of a countrys stock market relative to the size of its economy.
Market capitalization (MCap) to Gross Domestic Product (GDP) ratio is usually used to
gauge whether a market is overvalued or undervalued. In general, MCap to GDP ratios above
100% indicate that a market is overvalued, while ratios below 50% indicate that a market is
undervalued. MCap to GDP ratio also measures capital of listed firms at market price multiples
of subscription values, subset of all enterprise with wide variations in value from nominal to
multiples magnified by significance of foreign investments like HK and Singapore. In stark
contrast to low end Shanghai, Shenzhen and Osaka with robust economies in any event.
Figure 13 below shows the 2012 Domestic MCap to GDP ratios of Asian countries,
including the Philippines, and United States of America and United Kingdom, using data
gathered from the World Bank and World Federation of Exchanges (WFE). As seen in the chart,
Hong Kong Exchanges has the highest MCap to GDP ratio at 1,075.2%. The Philippine Stock
Exchange ranked in the middle at 91.6%, while Osaka Stock Exchange ranked the lowest at
3.4%.
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Figure 15 illustrates 2012 value turnover to domestic MCap ratio. Shenzhen Stock
Exchange topped other countries at 206.0%. The Philippine Stock Exchange was second to the
lowest at 15.2%. Bombay Stock Exchange ranked lowest at 8.7%.
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The ratios above indicate that, at least for the Philippines, the depth of the stock market
in terms of liquidity and its ability to facilitate capital expansion does not yet reflect the prevailing
stock prices which are currently at expensive levels relative to their peers. But there could
possibly be a rebalancing of such prices in the horizon, as the economy continues to grow and
listed companies become more profitable to justify their stock values.
A 2012 report by Standard Chartered Bank shares a similar view, in that the bank
expects the Philippines to undergo a re-rating process similar to what Indonesia went through
during the period 2006-2010, where the Indonesian markets price-earnings (P-E) ratio
expanded 3.5 percentage points as a result of bright prospects that included strong possibility of
investment grade status, increasing per capita income, and greater investment due to political
stability. From the two charts below, Standard Chartered has observed that the Philippines has
already begun the re-rating process in mid-2010.
Figure 17. Price-Earnings Ratios of Indonesia and Philippines
The research noted though that the key question remains if the likelihood of earnings
growth by listed companies can expand faster than the market forecast in the next two years.
Another study examining stock market development and economic growth was
conducted by Mohtadi and Agarwal (1998). The paper looked at 21 emerging markets, which
included the Philippines, from 1977-1997 and found a positive relationship between the two
indicators using two models to estimate long-run effects. It should be noted, however, that the
study did not present results on a per-country basis, and just considered the overall results for
the emerging markets data set. The first model utilized two steps to test whether the stock
market indeed has an effect on economic growth. Real investment as a fraction of GDP was first
regressed on three stock market variables, namely market capitalization ratio, total value of
shares traded ratio, and turnover ratio. The second step involved regressing a growth variable
derived from the World Development Indicators (2000) data set against the fitted value of
investments, foreign direct investment (FDI), GDP, and secondary school education. Based on
the results, turnover ratio, FDI, GDP, and fitted investment all showed strong positive influence
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on aggregate growth. Model 2, meanwhile, had a more direct approach in analysing the
relationship between stock market development and economic growth instead of looking at
investment behaviour. The growth variable from Model 1 was regressed against the variables
used in the same model. However, the results showed that turnover ratio, FDI and secondary
education were statistically significant and had positive relationship to growth.
Mohtadi and Agarwal further noted that different ratios were highly significant for the two
models for the two-staged model, the market capitalization ratio was the significant stock
market indicator while in the direct test model, turnover ratio served as the significant stock
market indicator. A possible interpretation for this result is that for model 1, a large-sized stock
market can lead to higher investment opportunities, showing market capitalization to be a better
instrument to represent investments. On the other hand, model 2, by controlling for investment,
reduces the significance of market capitalization.
IV. Conclusions
Historical data has presented that while the local stock market has been growing, it has
not expanded at a pace quick enough to match its counterpart markets. While one may point to
a variety of reasons, these can all be interrelated and has causal effects to other growthhindering factors. Consider, for example, the low awareness and negative perception of the
stock market investing that have been pervasive issues which continue to keep investor levels
low. Possible root causes to think about here are past events of stock price manipulation that
have deterred investors from returning; lack of understanding of how the stock market works
and the investment risks that it carries, which in turn has pushed Filipinos toward safer channels
such as bank deposits, and in worst cases, even led them to spurious investment vehicles that
promise high levels of return only to eventually run away with the investors money; or the lack
of products in the stock market that in turn do not really offer a lot of options to invest in.
The more recent data, however, has shown us that there could be a possibility for a
monumental change in the way people invest and save. Information these days are becoming
easier to look for through the internet, and this aids in reducing the uneven access to
information that markets usually encounter. Schools also offer stock market topics now and the
Commission on Higher Education has gone a step further by implementing CHED Memorandum
No. 39, which institutionalizes a capital markets subject for all students taking a business
administration major. As Filipinos and even foreign investors become more educated and aware
of the opportunities and risks in investing in the Philippines, the overall market maturity should
rise along with them. However, further development in the stock market still lacks a clear
indication of whether it can move much faster, if it is to catch up with its regional peers. In this
sense, the stock market could indeed be representative of the countrys economy, which has
been left behind, though hopefully now on track towards achieving not just higher but more
sustainable growth.
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REFERENCES
BSP Department of Economic Statistics. Consumer Finance Survey 2009. Bangko Sentral
ng Pilipinas. www.bsp.gov.ph
Hawksworth, J. and Teh, Y. 2013. Are stock markets reliable leading indicators of the real
economy for the US and UK? PriceWaterhouseCoopers Economics Consulting
Services.
Larrain, B. 2005. Stock Market Development and Cross-Country Differences in Relative
Prices. Pontificia Universidad Catlica de Chile.
Levine, R. and Zervos, S. 1996. Stock Market Development and Long-Run Growth. The
World Bank Economic Review, Vol. 10, No. 2.
Mohtadi, H. and Agarwal, S. 1998. Stock Market Development and Economic Growth:
Evidence from Developing Countries.
The
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7,
2001.