‘Hot’ money is good

Published on Wednesday, 21 November 2012 18:47

Written by John Mangun / Outside the Box

THERE are two subjects that most people consider themselves knowledgeable about, if not an expert; the human body and money and finances. Just because a person owns a body and has some money in the pocket, does not make a person wise about either.

A person who does know about the body like a physician for example studies for years and never stops learning. The same is true in the financial world.

Take the way money moves around the world, and more specifically, the stock markets.

For the administration to take any sort of credit for the advancing prices on the Philippine Stock Exchange (PSE) only proves my point about “experts.” The correlation between increasing stock prices and a successful and growing economy is often not true.

Between 1962 and 1964, the US economy grew by an average of 4 percent each quarter. The New York stock market went down by 50 percent. Between 1975 and 1977, the market nearly doubled as US growth hit 4 percent. Since 2009, US stock prices have more than doubled and the US economy has been growing at 2.3 percent.

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In 2010 the Stock Exchange of Venezuela rose 20 percent while the economy shrank by 4.4 percent. This year Venezuela is experiencing over 20-percent annual inflation. Its stock market is the best performing in the world. Why? Because inflation is running at over 20 percent. When inflation is high or a currency is devaluing, money runs to investments that have the chance of appreciating enough to offset inflationary pressures.

I think that some of my more “progressive” friends believe that businesses operate from the power of magical rainbows and dancing unicorns. Unfortunately, what keeps businesses thriving and economies growing is a constant supply of fresh capital. That is why a viable and vibrant stock exchange like the PSE is vital for economies to develop.

In the last year some P20 billion has been raised by smaller and larger companies through initial public offerings. Nearly an equal amount has been raised through “private placements” of stock to small very large investors, coming from both domestic and foreign sources.

All that money is used to expand and grow business and the PHL economy, and would not be as readily available without our stock market.

One of the silliest complaints from the “experts,” showing absolute ignorance of the financial markets, is how the stock market attracts “hot money.” Hot money are funds looking for a short-term return that also provides quick liquidity. We all have hot money investments. It is called a bank account.

Traditionally, foreign hot money has flowed into a country while seeking to take advantage of a quickly appreciating or depreciating currency as occurred during the 1997 Asian crisis. That will not happen in the Philippines, not with the Bangko Sentral holding $82 billion to stabilize the currency.

This foreign hot money does not come in and out as rapidly as the critics would claim. That is because to exchange dollars for pesos and then go back to dollars would mean an automatic loss of at least 2 percent, or about 80 centavos on the currency buy/sell spread.

One editorial in a local newspaper spoke of a $256 million outflow of portfolio investment from our stock market in October. That does not surprise me in the least. Including the mid-1990s stock market high, foreign investors have tended to buy near the top and sell near the bottom. And too bad for that foreign money that left in October since the market is already up 1.5 percent for November. And the dummies missed the 16-percent price gain in PNB and the 5-percent rise in Ayala Corp.

The editorial goes on to say that this hot money comes in and then leaves as soon as it makes a profit. So what? That is how a stock market should and does function. While hot money flows may not be an indicator of the quality of government economic policy (foreign direct investment measures that factor), it does attest to the quality of the financial and banking system. The PHL scores well in this regard. Further, hot money in the stock market shows, contrary to that same editorial, that the PSE and the regulatory environment, while not being five-star, does function effectively, comparable in comparison to many other global markets.

Foreign direct investment by definition must be cautious and long-term oriented. Hot money is a risk taker, looking at current conditions and more important, short-term national and global trends. Further, if those trends are not favorable, hot money will turn its back very quickly and walk away. Then you know you have a problem.

The overall trend of hot money investments here is favorable and should be further encouraged.

E-mail to mangun@gmail.com, web site is www.mangunonmarkets.com, and Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by COL Financial Group Inc.