* This is my column in BusinessWorld on February 22, 2018.
At first there were bureaucracies, endless subsidies, and
new taxes; second were price hikes due to the new taxes; third, monetary control
measures to minimize price hikes; and fourth, investment funds react to these
monetary controls, especially regarding the exchange and interest rates.
That in a sense, is how a nonfinance researcher like me
would attempt to connect the dots. The first and third actions are government
interventions while second and fourth are market reactions to these
interventions.
Since I am not a stock market analyst, I chose to attend
the BusinessWorld Stockmarket Roundtable held Tuesday at Makati Shangri-La Hotel.
After all, it was a good opportunity for researchers and investors to know more
about the stock market.
There were four speakers that afternoon. Augusto “Gus”
Cosio, Jr., president of First Metro Asset Management, Inc.; April Lynn Tan,
vice-president and head of Research of COL Financial Group, Inc.; Justino “Jun”
Calaycay, Jr., head of Research and Engagement Department of Philstocks
Financial, Inc.; and Michael “Mike” Gerard Enriquez, chief Investment officer
of Sunlife Financial.
Gus Cosio argued the following points, among others: (1)
the TRAIN’s personal income tax cut will put more cash in the pockets of
salaried people, good for current account, savings account (CASA); (2) rise in
short-term interest rates are good for net interest margin (NIM) expansion; (3)
rise in prices will raise demand for working capital; (4) decline in required
reserves will reduce intermediation cost; (5) better macro growth means fewer
troublesome loans; (6) never put all your hopes on one or two stocks and invest
in a basket of stocks.
Mike Gerard Enriquez started being less optimistic and
enumerated sources of potential disruptors in the stock markets: (1) faster
hikes in US Federal rates and balance sheet reduction, (2) faster pace of peso
depreciation, the worst-performing Asian currency at the moment, (3) higher
inflation due to new taxes, (4) worsening current account deficit, and (5) risk
in government implementation of reforms. Overall though he is optimistic and
expressed the need to expand the number of listed companies at the PSE.
April Tan highlighted the following points, among others:
(1) market correction in January was expected due to hike in US bond rates, (2)
the correction was a good opportunity to accumulate stocks at more attractive
valuations, (3) weaker peso and higher taxes are inflationary and can adversely
affect consumer spending, (4) but inflation is not a long-term but a short-term
issue, (5) historically, equity markets have gone up with higher rates, and (6)
long-term economic prospects remain positive with favorable demographics, high
remittances from OFWs and growing BPO sector.
Jun Calaycay discussed these considerations, among
others: (1) the Bangko Sentral ng Pilipinas is expected to raise interest rates
1-2 times this year, (2) higher inflation from TRAIN is felt more by people on
the ground, (3) despite these, Philippine economy will continue to expand, (4)
good prospects this year are construction and allied services, power and energy
sectors.
I learned several lessons, especially for a nonfinance
guy like me. My concerns and research work are focused on government policies
that distort the normal incentives system if markets are left more freely.
Encouraging more portfolio investments and foreign direct
investments (FDI), more big infrastructure projects via integrated PPP and not
“hybrid” PPP and without tax hikes à la TRAIN — all these took place during the
past administration.
For instance, there was a big increase in the Philippine
stock market capitalization in one decade, 3.5 times expansion in 2015 or 2016
level as against the 2006 level while other neighbors managed to expand less
than 2 times. And the Philippines’ market capitalization was at the median
level of 80+% of GDP, comparable to South Korea level (see table).
Inflationary pressures coming from tax hikes while
retaining high tax rates elsewhere (VAT, corporate income tax/CIT, withholding
tax, etc.) can adversely affect consumer spending, which, in turn can affect
overall macroeconomic performance.
That is why the coming TRAIN 2 should aim for significant
tax cuts in CIT and VAT while reducing the number of exemptions and tax
holidays. A nontax-hungry TRAIN can tame inflation, stabilize the credit
markets and expand the stock markets.
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See also:
BWorld 187, Asians’ freedom from high inflation and regulations, February 24, 2018
BWorld 188, Estimating electricity price hikes resulting from TRAIN, March 10, 2018.
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