Tetangco Sees Herd Mentality Boosting Volatility: Southeast Asia
Philippine central bank Governor Amando Tetangco is prepared for volatility in local markets after flooding led to a three-day trading suspension while regional stocks sank to one-year lows and currencies weakened.
The Philippine Stock Exchange Index sank as much as 6.9 percent today, the most in five years, before closing 6 percent lower. The peso fell 1.1 percent to 44.167 per dollar, the weakest since February 2011. The country’s stock exchange was shut this week and trading of currencies and government bonds was halted because of floods in Manila and a public holiday yesterday. The MSCI Southeast Asia Index tumbled 5.5 percent during the period to the lowest level since July 2012.
The combination of Indonesia’s record current-account gap, Thailand’s economic contraction and increased speculation that the Federal Reserve will pare stimulus has spurred foreigners to sell $909 million of shares in the two Southeast Asian nations this week. Investors first began pulling money out of Thai, Indonesian and Philippine stocks three months ago after Fed Chairman Ben S. Bernankesignaled on May 22 he may reduce bond purchases that spurred capital inflows into emerging markets.
“From experience, we’ve seen markets not only overreact, they also move in herd,” Tetangco, the head of Bangko Sentral ng Pilipinas, said in an e-mailed response to questions yesterday. The central bank “will assess if movements in the peso are excessive, relative to movements in other currencies and other market prices, and then act accordingly to minimize such volatility in the exchange rate,” Tetangco said.
Indonesia’s rupiah weakened 3.7 percent and the Thai baht dropped 1.9 percent in the past three days.
One-month implied volatility for the peso, a gauge of expected price swings derived from options, rose 114 basis points to 6.86 percent in the past three days, data compiled by Bloomberg show. That compares with increases of 626 basis points to 18 percent for the Indonesian rupiah, 138 basis points to 9.74 percent for the Malaysian ringgit and 120 basis points to 7.19 percent for the Thai baht.
The MSCI Southeast Asia index’s 100-day historical volatility increased to 17.1 yesterday, the highest level since March 2012. Indonesia’s Jakarta Composite Index has tumbled 7.7 percent this week through yesterday and the Thai SET Index dropped 6.3 percent, the most among equity gauges in 45 emerging and developed markets tracked by Bloomberg. The FTSE Bursa Malaysia KLCI Index fell 2.4 percent during the period.
“Investors are in a risk-off mode in anticipation of a tapering in U.S. stimulus,”Paul Joseph Garcia, head of the institutional business at BPI Asset Management Inc., the second-biggest Philippine money manager, said yesterday.
The Philippine Stock Exchange Index increased 12 percent this year before today, compared with a 6.9 percent drop in the MSCI Southeast Asia gauge. The peso has weakened 6.7 percent against the dollar while the BofA Merrill Lynch Philippines Government Index of local bonds has returned 13 percent.
President Benigno Aquino suspended work in government offices in Manila for a second day on Aug. 20. At least eight people were killed and more than 100,000 fled their homes amid heavy rains that swamped as much as 60 percent of Manila and nearby provinces, according to the disaster and risk-reduction agency.
While the flooding may curb agricultural production and lead to higher food prices, it’s unlikely to have a meaningful impact on the nation’s economic outlook, Garcia said.
Gross domestic product in the Philippines increased 7.8 percent in the first quarter from a year earlier, the fastest expansion among 17 Asia-Pacific economies tracked by Bloomberg.
The nation won its first investment-grade scores from Fitch Ratings and Standard & Poor’s earlier this year. Moody’s Investors Service, which ranks the nation a step below investment grade, said last month it’s reviewing the rating for an upgrade.
“Domestic demand, which remains healthy, is seen to continue to be a core driver of growth,” Tetangco said.
Philippine markets are vulnerable to foreign outflows as the Fed moves closer to paring its unprecedented economic stimulus, according to Jonathan Ravelas, the chief market strategist at BDO Unibank.
The Philippines, Thailand and Indonesia led the four-year rally in global stocks through May as growing local economies sent corporate profits to record highs and the Fed’s bond-buying program spurred international investors to seek riskier assets. The Philippine equity gauge is valued at 18 times projected earnings for the next 12 months, the highest level in emerging markets, data compiled by Bloomberg show.
“Markets that attracted relatively more portfolio money this year and the previous years when global liquidity was generous will be vulnerable,” Ravelas said.
The Fed will probably cut its $85 billion in monthly bond purchases next month, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13. Fed policy makers were “broadly comfortable” with Bernanke’s plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting showed yesterday.
“Almost all committee members agreed that a change in the purchase program was not yet appropriate,” and a few said “it might soon be time to slow somewhat the pace of purchases as outlined in that plan,” according to the record of the Federal Open Market Committee’s July 30-31 gathering.
“Foreign funds have been flowing out of the entire region,” Pakorn Peetathawatchai, executive vice president at the Stock Exchange of Thailand, told reporters on Aug. 20. “The holding reduction will be in every country regardless of their economic fundamentals.”