Thursday, June 13, 2013

The biggest PSEi drop in recent history, what happened?

It has been a bloody market today. The stock market dives to 6,114.08 or -6.75%, the largest drop since 2008. Why is this happening despite our emerging economy?

To explain this, we have to look what's happening outside the Philippines:

Japan's Stock Market Plunge 

Japan contributes largely to the worries in the Asian financial market. Nikkei is down by more than 6 percent  today. The drop is among the many we've seen in the past few weeks which ultimately caused Japan to officially enter the bear market. Everyone is cautious on what's may happen next.

The quantitative easing of its central bank is backfiring, plus other global economic worries (below) also factor in.

U.S. Fed to Lessen QE 

Quantitative easing (QE) is a solution that the U.S. government devised to save its economy from crashing. It does that by buying billions worth of bonds each month in order to stop the prices from free-falling. This was proven effective in the short period it was established, but now, the market seems to be dependent on govt's stimulus. There's a lot of uncertainty what will happen when the govt stops quantitative easing. This uncertainty breeds fear, which in turn, drives the stock market down. And when the U.S. stock market falls in this global economy, everyone also falls.

China's Economy is Slowing Down 

China is the industry engine of the world, almost everything is made in China. When China reports that its economy is slowing down, it reflects that the global demand is slowing down which again invokes fear and uncertainty.

There are a lot of uncertainties in the global market, not to mention the economic problems in Europe. These uncertainties multiplies the effect in our stock market today triggering a major sell-off. Closely monitor what happens to Japan, U.S. and China and you'll have an idea what will happen to the global financial economy and how it will affect the Philippine stock market.

I believe we area nearing a global financial catastrophe if this continues and if there are no positive news to impact the market. Fortunately for the Philippines, we may still have an ace card: MOODY's upgrade rating which is expected soon, will it trigger a reversal from our market slump?

What is to be done during these times

The problem is no one knows how low it'll get. There are some signs to look for like when the market stops plunging and moves sideways. The good thing is the market phases do not usually happen in one day so you'll have time to react.

Market Emotion
So where do you think are we? Probably between "Fear" and "I'm out"?  

The market is very volatile, during this time, investors protect their money by liquidating them (to avoid the effects of further depreciation). People withdraw their investments from mutual funds, uitf, stock market etc. This has an adverse effect on the stock market because it will drive stock prices down, which is currently what's happening, locally and abroad. The net foreign sell (NFS) in our stock market is huge in the past few weeks.

But again, no one knows how low we'll reach. Are we at the lowest point this year? If we are then it's a great opportunity to buy, if we're not then it's time liquidate. We'll see :)