OF SUBSTANCE AND SPIRIT

Business activities are judged based on, among other key indicators, the strength of both market support and resistance. Fundamental factors could drive the dynamics in the local bourse like the uptick in inflation in February 2024 that pulled down the bellwether index by as low as 113 points last Tuesday. Before the weekend, the market had recovered by 1.53 percent or 104.87 points to close at 6,942.21!

Indeed, the stock market reacts, and many times disproportionately wild, to some unexpected news. 

This is the main point of Robert J. Shiller who won the Nobel Prize in Economics in 2013, together with Eugene Fama and Lars Peter Hansen, for his pathbreaking work on why widespread overvaluation of investors could happen in the context of what he called “irrational exuberance.” Financial markets are subject to “bubbles” or rapid increases in asset prices that are unsustainable. Over time, changes in stock and bond prices do occur in predictable patterns that reflect investors irrational exuberance over market prospects.

Ironically, he shared the prize with Fama who championed the view that markets are efficient. In receiving the award, Shiller admitted he was part of that generation that subscribed to market efficiency. In his subsequent works, Shiller proved “that the apparently impressive evidence for market efficiency was not unimpeachable.” Markets can fail.

In the third edition of Shiller’s best-selling book, Irrational Exuberance (2015), he clarified that those episodes of irrationality are not unique to the US. They could also happen elsewhere. In Chapter 8, “New Eras and Bubbles Around the World,” the Nobel laureate examined the largest stock market movements around the world before 2000. His theory: “…prices in these countries have tended to reverse after making exceptionally large increases, as one would expect if bubbles were common among them.”

In his account of the 25 largest recent one-year real stock price index increases in Table 8.1, the Philippines was top with 683.4 percentage increase over the period Dec. 1985 – Dec. 1986. Taiwan and Venezuela were far second and third. In Table 8.2, Shiller showed the 25 largest recent one-year real stock price decreases. The Philippines was seventh with nearly 62 percent decline over the period October 1973–October 1974. 

We see from Table 8.3 the largest five-year real stock price increases with the Philippines on top with 1,253.2 percent rise over the period Nov. 1984 – Nov. 1989. Finally, in Table 8.4 which listed the 25 largest recent five-year real stock price index decreases, the Philippine stock market appeared three times with percentage declines of as much as 83 percent during various periods. A few Asian stock markets were also in the list but they appeared only once.

The Philippines’ narrative was not lost in him: “The biggest one-year real stock market increase of all, in the Philippines from December 1985 – December 1986, was an amazing 683.4 percent. The biggest five-year real price change, of 1,253 percent also occurred in the Philippines.” Index declines were not as large.

Based on our own recall of history, those enormous adjustments in stock prices were preceded by periods of uncertainty and great distrust of the country’s prospects. They included the 1969 reelection of Marcos Sr. followed by the devaluation of the peso, and the period of martial law until it was nominally lifted in 1981. The second oil crisis also happened during this period in 1979. The lifting of martial law in 1981 did not mitigate the economic conditions such that Marcos was forced to call for a snap election. In 1983, former Senator Ninoy Aquino was assassinated that sent shock waves throughout the economy. A debt moratorium was announced in October 1983. Growth declined, inflation was over 50 percent, and interest rates were as high. The stock market had collapsed.

Shiller characterized the dynamics during this period as negative bubbles. Price- earnings ratios were dismally down such that the succeeding gains may be considered significant reversals of such historic lows. Top stocks like PLDT and San Miguel were selling at two to three times their earnings with steep discount to their asset values.

On the other hand, the largest gain was recorded during the 1986 EDSA Revolution that Shiller described as leading to the collapse of the dictatorship, Marcos fleeing the Philippines and a new government installed. “Once the new government was in place, the country developed renewed hope; a “new era” certainly seemed at hand.” Contrary to many expectations, Shiller observed that the gains were not reversed in the next five years. Based on stock market behavior, confidence was rather intact during the three years after EDSA.

In fact, the biggest equities’ gains of 1,253.2 percent took place during the five-year period spanning the country’s 1984 debt moratorium, the 1986 EDSA and subsequent installation of a new government despite several attempted coup d’état. 

We are wiser today to learn that despite all the succeeding economic challenges of a bankrupt public treasury, high fiscal deficit and widening public debt, strategic policy and structural reforms were undertaken over the next two decades to establish a more resilient and robust growth path that resulted in uninterrupted positive growth from 1999 through 2019.

The equities market could have been exuberant per Shiller, partly because the fundamentals have something rational to show for some of those years.