12th National Convention on Statistics (NCS)

EDSA Shangri-La Hotel, Mandaluyong City

October 1-2, 2013

PHILIPPINE STOCK MARKET IN PERSPECTIVE

by
Regina Georgia R. Crisostomo, Sarah L. Padilla, Mark Frederick V. Visda

For additional information, please contact:

Authors name
Designation
Affiliation
Address
Tel. no.
E-mail

Mark Frederick V. Visda

Head of Corporate Planning & Research Department
Philippine Stock Exchange, Inc.
Ayala Triangle, Ayala Avenue, Makati City 1226
(632) 819-4100
mvvisda@pse.com.ph; mvisda@gmail.com

Authors name
Designation
Affiliation
Address
Tel. no.
E-mail

Regina Georgia R. Crisostomo and Sarah L. Padilla,

Data Analysts
Philippine Stock Exchange, Inc.
Ayala Triangle, Ayala Avenue, Makati City 1226
(632) 819-4100
rrcrisostomo@pse.com.ph; slpadilla@pse.com.ph

PHILIPPINE STOCK MARKET IN PERSPECTIVE

by
Regina Georgia R. Crisostomo, Sarah L. Padilla, Mark Frederick V. Visda1

ABSTRACT
The Philippine stock market is one of the earliest exchanges established in Asia
and has a rich history of events that have contributed to its development. It is also
considered as a barometer of future economic performance, and for years has served its
primary functions of facilitating the dual role of capital raising for companies and trading
of shares by investors. The paper takes an in-depth look at available historical data since
the unification of the previous two stock exchanges. The time series information provides
insights on the development of the stock market, and how some of its characteristics
persist while some are undergoing gradual changes. Finally, the paper examines several
studies that suggest the stock markets relationship to economic growth and presents
cross-country stock market development ratios that can serve as jump-off points for
1
further examination and study.

I.

Brief History of the stock market in the Philippines

The first stock exchange in the Philippines was set up on 08 August 1927 during the
American colonial period as the Manila Stock Exchange, Inc. (MSE). Operations ceased during
the Japanese occupation and resumed in 1946 after Japans surrender in 1945. As of 25
January 1946, only fourteen (14) companies were listed in the MSE, divided in the following
sectors: Banks, Sugars, Commercial and Industrials, Insurance, and Mining. There were thirtythree (33) brokers on record, twenty (20) of which were active as of October 1947.
On 27 May 1963, the Makati Stock Exchange, Inc. (MkSE) was organized. The MkSE
started operations on 16 November 1965. Eighteen (18) companies were listed in the MkSE on
its first day of operations, sixteen (16) of which were also listed in the MSE. In 1973, a
Presidential Decree was passed, ruling automatic listing in both exchanges of securities that
have been approved for listing and trading. Two years later, the Securities and Exchange
Commission (SEC) implemented uniformity of price fluctuations, board lots and trading symbols

The authors are all employees of The Philippine Stock Exchange, Inc. Ms. Crisostomo and Mr. Visda are part of the Corporate
Planning and Research Department (CPRD), while Ms. Padilla was previously a part of CPRD but now works for the Market
Education Department. The authors would like to acknowledge and thank former PSE President, Mr. Ernest Leung, for his invitation
and prodding for the team to produce this discussion paper, which aims to support Mr. Leungs advocacy of educating Filipinos
about the stock market. Any views or opinions, either defamatory or complimentary, are solely those of the authors and do not
necessarily represent those of the PSE. The PSE together with its affiliates and subsidiaries will not accept any liability arising from
the consequences of, and any actions or decisions made in respect to any statements expressed henceforth.

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in both the MSE and MkSE. Composite indices were introduced in MkSE and MSE in 1978 and
1986, respectively, in order to measure market movement.
The Philippine Stock Exchange, Inc. (PSE) was incorporated on 14 July 1992, in
anticipation of the unification of MSE and MkSE. The one price-one market exchange was
achieved through the link-up of the two existing trading floors on 25 March 1994. Overall, there
were 189 listed companies with a total market capitalization of Php1.39 trillion, volume of shares
traded of 704.27 billion, and value turnover of Php364.30 billion.
In 2006, to accommodate the growing diversity of listed companies in the Exchange and
provide better sector comparables, the industry classification of listed companies was revised
and companies were classified according to their major source of revenue, instead of the
primary purpose stated in their articles of incorporation. The six sectors currently being used
were established, namely, Financials, Industrials, Holding Firms, Property, Services, and Mining
& Oil.
Whole day trading was implemented on the first trading day of 2012, starting at 9:30am,
with a recess at 12nn to 1:30pm, and closing at 3:30pm. This aimed to align the Exchanges
trading hours with other Asian exchanges, and to increase market liquidity by opening up
trading in the PSE to markets in other time zones. During the said year, the PSEi hit 38 record
highs (45 intraday), at a peak of 5,832.83 on 26 December 2012. The PSEi closed at 5,812.73
at the end of 2012; there were 254 listed companies, 234 of which were traded during the year.
Total market capitalization was at Php10.93 trillion, volume traded was 1.04 trillion, and value
turnover was Php1.77 trillion.
During the first eight months of 2013, the PSEi first surpassed the 7,000 mark on 22
April 2013 at 7,120.48. Thirty-one (31) record high instances for the PSEi closing levels have
been achieved, reaching its peak on 15 May 2013 at 7,392.20, a 27.2% increase from its 2012
closing level. Total value turnover as of end-August 2013 has also exceeded the full year value
turnover recorded last year, at Php1.78 trillion.
Figures 1 and 2 illustrate the growth of the PSE in the past 15 years. While the main
index PSEi grew to reflect increasing stock prices, market liquidity also expanded as measured
by total value turnover and trade frequency (number of trades). From less than 5,000 trades a
day during the bear period spanning the late 1990s and early 2000s, the market has now grown
to more than 30,000 trades a day. Aside from benefitting from positive developments in both the
local and international fronts, several factors also contributed to the expansion. These include
the upgrade to a new trading system that could easily handle a significantly higher volume of
trading, and the extension of trading hours to include an afternoon session. The strength of local
company fundamentals also had a big impact to increased interest in Philippine equities.

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Figure 1. Daily PSEi and Total Value Turnover (in million PhP)

Source of basic data: PSE; value turnover data truncated to Php15 billion
Figure 2. Daily PSEi and Frequency of Trades

Source of basic data: PSE; trade frequency data truncated to Php35 billion
It is also interesting to look at the difference over time in average value turnover per
trade in the market, as seen in Figure 3. The data range was narrowed down to value of trades
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up to Php100,000, as this is the interval where most of the trade frequencies occur. The results
show there has been a marked increase from 1998 to 2012 in the number of trades which are
valued lower. Specifically, trades that are valued at Php6,000 and lower have the biggest
frequency for 2012 compared to the largest frequency in 1998 which ranged from Php10,000 to
Php12,000. The comparison between 1998 and 2012 in terms of number of trades valued at
Php2,000 and below has also been staggering, perhaps supporting the perception that there are
more retail investors actively participating in the market today. It should be noted though that the
analysis made here did not consider year-to-year changes, and did not factor in market-moving
events that happened during these middle periods. This could be a subject for further analysis in
the future.
Figure 3. Frequency of Trades based on Value Traded, 1998 vs. 2012
350,000

300,000

250,000

Frequency 1998

Frequency

Frequency 2012
200,000

150,000

100,000

50,000

Value (in Php)

Source of basic data: PSE

Another indication of the continued development of the local stock market can be seen in
its market capitalization (MCap), which estimates the total value of the entire market.
Specifically, Figure 4 shows that the MCap of domestic companies has grown substantially that
it has reduced the MCap share of foreign firms listed in the PSE. Since Sun Life Financial
Corporation and Manulife Corporation listed in the Exchange in 1999 and 2000, respectively,
these two companies have cornered about 50%-60% of the total MCap for several years. As of
2012, this foreign-local ratio has been reduced to 20%-80% in favor of domestic companies.
Apart from improved net income performances that pushed valuations higher, the emergence of
various conglomerates as well as merger and acquisitions which led to the creation of larger
firms also contributed to higher-valued companies.

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Figure 4. Total Market Capitalization of Domestic and Foreign Listed Companies

Source of basic data: PSE

In terms of capital-raising activities due to IPOs and follow-on offerings also referred to
re-IPOs (an already listed company conducting another offering to the public), historical levels
have been volatile and in most cases, followed the prevailing market sentiment. The lack of new
listings also predictably coincide with market downturns, as IPO candidates prefer to get the
most value of the sale of shares. It is positive to see though that there are usually more primary
or new shares are issued in IPOs which create more value to the company and investors
instead of secondary shares which mainly benefit majority owners looking to cash out their
investment.
Figure 5 illustrates that early on, primary issuances took up most of the capital raised but
later on, there have been increasing amounts of listed companies undertaking follow-on
offerings. This indicates that there are a listed firms who see a lot of value in continuously
utilizing the stock market to raise funds for their projects, instead of the typical one-and-done
listing mindset that other companies have where they barely bother looking at additional equity
capital, and would rather borrow from banks.

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Figure 5. Capital Raising Activities and PSEi Closing Levels, 1994-2012

140,000.00

120,000.00
100,000.00

7,000.00
Follow on (Primary)
IPO (Secondary)
IPO (Primary)

6,000.00
5,000.00

PSEi Closing Levels

80,000.00

4,000.00

60,000.00

3,000.00

40,000.00

2,000.00

20,000.00

1,000.00

Source of basic data: PSE

While there are various components that make up a stock exchange, there are three
main components that can be identified, namely, investors, listed companies, and trading
participants. These three parts interact dynamically to ensure the efficient operation of a stock
market. Each group has also experienced its share of changes as the stock market developed
over the years, but has largely remained dependent on each others growth not letting one
move too far ahead or behind from the others.
Investors can perhaps be referred to as the lifeblood of the stock market, supporting the
success of its counterparts capital raising activities for listed firms, and the trading of shares
for trading participants. The PSE, through its Stock Market Investor Profile (SMIP) report, only
began tracking the number of investor accounts and the profile of these investors in 2008. The
results every year have shown that, while investors have been growing, the overall investor
base of 525,850 investor accounts has not reached a level that would indicate a widespread
participation in the local market. This total barely accounts for half a percent of the estimated
100 million Filipino population, and may indicate that stock market investment continues to be
limited to those which have a high level of disposable income and educational background to
understand how the market works.
But while the five-year compound annual growth rate (CAGR) of investor accounts has
only been at 4 percent, a new class of investors has been emerging due to rapid technological
advancements. Online investors, which have recorded an astounding CAGR of 42 percent in
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the past five years, already account for 14.9 percent of the total investor accounts base a 10
percent jump from only 4.3 percent in 2008.

Figure 6. Total Investor Accounts and Online Accounts

650,000
600,000
550,000
500,000

450,000
400,000
2008

2009

2010

Total Online Accounts

2011

2012

No. of Accounts

Source of basic data: PSE Stock Market Investor Profile Reports

In addition to providing the investor count, the SMIP has also been able to offer insights
into the quality of investors in the market, including investor distribution by age group, income
bracket, gender and location. The limitation of the retail investor profile data, however, is the
lack of complete submission of data from the trading participants. Still, about 70% of the 134
TPs submitted information making the sample more representative of the actual numbers.
Figure 5 shows the distribution and growth of retail investors by age group. While the 1829 years old age bracket is the smallest among the groups, it has been growing at the fastest
rate, with a three-year compound annual growth rate (CAGR) of 53%. The growth of the 30-44
age bracket is also worth noting, as it has grown at a CAGR of 32% and has in fact surpassed
the 45-59 age group in terms of percentage share to the total.
This is perhaps indicative of several factors. One is that there is an ongoing shift in the
age composition of investors to an increasingly younger group. Possible reasons for this trend
include greater awareness in general about stock market investing, the emergence of online
platforms making trading easier and more convenient, and declining interest rates in the past
few years making stocks more attractive. The growing population should also be considered as
a factor, in that the increasing share of younger investors might only be in proportion to the
growth of their population base and not because a higher percentage of this bracket has
actually started to invest in stocks. Another factor that could be further studied is whether the
younger age brackets disposable incomes have increased over time to enable and embolden
them to enter the stock market.

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Figure 5. Retail Investors by Age Group, 2008-2012

250,000

60 and Above
200,000

45 to 59
30 to 44
18 to 29

150,000

100,000

50,000

2009

2010

2011

2012

Source of basic data: PSE Stock Market Investor Profile Reports

Looking at investors in terms of their annual income brackets (Figure 6), the less than P500,000
annual income group has grown at 46% CAGR for the last three years, outpacing the two other
income groups, to become the largest group. This trend could be related to the previous
information about a greater number of younger people investing in stocks, as these individuals
are just in the early-to-middle stages of their careers.
Figure 6. Retail Investors by Annual Income, 2008-2012
100,000

90,000
80,000
70,000

Less Than P500,000

P500,000 to P1Million
Above P1Million

60,000
50,000

40,000
30,000
20,000
10,000
2009

2010

2011

2012

Source of basic data: PSE Stock Market Investor Profile Reports

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Regarding the location of investors indicated in Figure 7, it is not surprising to see that
majority of investors are situated in Metro Manila, the hub of economic activity in the country.
While the PSE has made efforts to reach out to areas outside of Metro Manila even
establishing a satellite office in Cebu in 2011 and conducting multiple roadshows in Cebu, Iloilo,
Cagayan de Oro and Davao the overall interest in stock market investing in these regions
remains largely untapped.
Figure 7. Retail Investors by Location, 2008-2012
120,000
100,000
80,000

Foreign

Mindanao
60,000

Visayas
Luzon

40,000

Metro Manila
20,000
2009

2010

2011

2012

Source of basic data: PSE Stock Market Investor Profile Reports

Stock exchanges are usually home to the worlds biggest companies, and this is no
different in the Philippines, which carries widely-recognized local corporations such as PLDT,
Ayala Corporation, San Miguel Corporation, and SM, among others. However, despite nearly
800,000 companies registered and licensed by the Securities and Exchange Commission (SEC)
to do business in the Philippines, only 253 firms have their shares publicly listed in the PSE, a
measly 0.03% of the total. The small number of listed companies could be attributed to various
reasons such as a prevalent culture of family corporations hesitating to open up to a more
diversified ownership structure, cost barriers to raising capital through the stock market, and a
general lack of understanding on how the market can be beneficial in many ways for
companies.
Further, based on the Top 1,000 Corporations in the Philippines report released by the
SEC in 2011, only 93 listed companies made the cut when measuring total revenues, and 28
made it into the Top 100. This provides some insight into the overall quality of companies listed
in the Exchange, and could potentially fuel further discussion on whether listed firms indeed
represent the economys growth and movements. It should be noted as well that the Top 2 in
the rankings (Petron Corporation and Manila Electric Company) are listed companies, which at
the very least confirms that the shares of stock of the highest-earning firms in the country are
publicly listed and traded.
As earlier mentioned, trading participants (TPs) have been integral in the establishment
of the countrys two stock exchanges and their eventual consolidation. To date, there are 184
TPs in total, but only 134 are active. Even more so, 20 out of the 134 brokers account for about
an 80 percent share of total value of trades in a year. This statistic is indicative of the reality that
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the market continues to be too small to be able to absorb the high number of TPs, especially
with the Philippines larger counterpart exchanges in the region only holding an average of 4050 brokers.
The PSE is host to 111 local and 23 foreign TPs. Historically, the share of each group to
trading activity has fluctuated and largely depended on market conditions at certain points of
time. Figure 8 shows the distribution of total value turnover among local and foreign TPs since
1994. Local TP trading activity remained robust in 1994 up to 1999, even outpacing foreign TP
trading levels early on. However, the lingering effects of the 1997 Asian financial crisis
compounded by adverse political and economic conditions on the local front combined to create
a drag on trading activity and forced several brokers to suspend their operations. From 184 total
TPs, the number was reduced to 150 in 2001 and further declined to its current count of 134
brokers. While total trading activity also dropped significantly, the distribution between local and
foreign brokers became in favour of the foreign TPs from 2001 to 2004.
The support of local TPs to the market then started to pick up again in 2005 as concerns
on the overall health of the political and economic systems were slowly alleviated. Even with the
occurrence of the 2008 crisis, unlike in the early 2000s, local TPs have been able to maintain
their share of about 50% to total trading activity. As foreign funds have flowed into emerging
markets during the past 3 years, local TPs have matched this surge, which is an encouraging
sign for the sustainability of local brokerage houses over the long-term.
Figure 8. Value Turnover for Local and Foreign TPs, 1994-2012
Turnover
(in P bn)

Index
value

4,000

7,000
Local TP

3,500

6,000

Foreign TP

3,000

5,000

PSEi Closing Levels

2,500

4,000

2,000

3,000

1,500

2,000

1,000

1,000

500
2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

Source of basic data: PSE

II. The Filipinos perception of the stock market
According to the first Consumer Finance Survey (CFS) conducted by the BSP in 2009,
only 21.5% of the households have bank accounts, while only a very small percentage of these
owned securities and investment accounts such as stocks, bonds, mutual funds, and unit
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investment trust funds (0.4%). In NCR, 0.8% had invested in any of these financial instruments
while in AONCR, the percentage was negligible.
In the June 2009 survey of the Social Weather Stations, it reported that only 1.0% of the
Filipinos said that they own any stock. This is consistent with the number of investor accounts
opened in stockbrokerage firms, as earlier cited that approximately, only 1/2 of 1.0% of the
countrys population are stock market investors, which is equivalent to 525,850 accounts. This
number could be lower as there are some investors that have accounts in other brokers and
thus counted several times. This pales in comparison to the US, where a reported estimate of
50% of the population have investments in the stock market through various products that their
exchanges offer. Other countries in Asia such as Hong Kong, Malaysia and Singapore, also
have higher investor bases that represent 35.7%, 12.5% and 12.0% of their respective
populations. There is a possibility that the size of these countries economies, combined with the
higher level of sophistication and product diversity of their stock markets, have driven up their
investor participation.
On the other hand, retail investors in Thailand account for only 1.0% of the countrys
population, while Indonesias retail investors comprise about 0.15% of its population. In terms of
size of the economy, these two are closer peers of the Philippines. Indonesias lower investor
population ratio despite having a bigger economy could be attributed to also having an
enormous total population.
There are many factors that possibly explain why Philippines investing population is only
minute relative to the total population. One is that the prevalence of poverty in the country could
mean that those who do not have the funds to invest could not be expected to participate in the
stock market as investors. But if analysed further, assuming a population of 94 million, of which
20.4 million (or 21.5% based on BSP data) have accounts in a bank, the 500,000 accounts in
the stock market represent a mere 2.4% of the people with funds to invest in instruments (such
as shares of stock) other than basic deposits. If one is to be more specific, of the 21.5% banked
households (i.e., those with deposit accounts), only 60% had interest-bearing deposit accounts.
This further indicates that a significant number of deposit accounts had an average daily
balance below the required amount to earn interest or had earned a negligible amount of
interest. Assuming we only get the 60% of the total households with deposit accounts, since
only they have sufficient funds for investment by meeting the minimum required average daily
balance at the very least, there are still 11.7 million (95.9%) potential stock market investors but
have not gone to other non-bank deposit forms of investment, such as the stock market.

III. Relationship of the stock market to economic growth

Recent market performance
The globalization of economies has created an environment in which stock markets
around the world can be affected by developments in various regions. The Philippine stock
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market, in particular, has found itself moving in step with the US market for the better part of its
existence, owing to the Philippine economys dependence on the worlds largest economy.
However, looking at about two decades worth of data from 1992-2013, it can be observed that
the two markets stock indices have moved in divergent paths at different points during the
period before again moving nearly parallel to one another. (Figure 9)
Figure 9. US (DJIA) and Philippine (PSEi) Stock Indexes

DJIA

PSEi

Source: PSE, Bloomberg

The first divergence point can be seen in early 1997, which signaled the 1997 Asian
Financial crisis. Stock markets in the region including the Philippines suffered significant losses
during this period. The PSEi seemed on the way to recovery after the crisis, but was again set
back by the uprising against then President Joseph Estrada combined with the September 11
terrorist attacks in the US during the early 2000s. The Estrada trial and eventual ouster,
specifically, may have had long-lasting effects on Filipinos perception of the stock market as the
alleged stock price manipulation of one of the listed companies linked to Estrada and his allies
led to massive investor losses.
Slowly but surely, the Philippine stock market recovered from its troubles and
experienced a strong run along with most global markets from 2003 to 2007. Unfortunately, the
markets path was derailed by the US subprime crisis which set off a chain of events that led to
a full-blown financial crisis, particularly in the US and Europe. A global bear market ensued as a
few countries defaulted from enormous amounts of debt while some were on the verge of
defaulting as well.
While the effects of the latest crisis continue to linger up to this day and has considerably
slowed the recovery of Western countries, Asian economies proved to have been hardened by
their own financial crisis in the late 1990s. After bottoming out in 2008, stock markets in Asia
started an unprecedented run that saw the rise of emerging markets such as the Philippines and
Indonesia. These emerging markets had become choice destinations for investments looking
for higher yields given the uncertainties in most developed markets. The second divergence
point in the graph between the Dow Jones Industrial Average and the PSEi also occurred during
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this period, with the PSEis current run-up being supported by the impressive economic growth
of the Philippines.
These two divergence points can be seen as markers that started or could potentially
start a shift in the Filipino investment paradigm. The first one, as mentioned, clouded the opinion
of many Filipinos about the stock market and, perhaps unfairly, magnified the risk involved in
investing in stocks. The declining interest from that point on can be seen in the ratio of local to
foreign trading activity, as local trading plummeted to 39.4 percent in 2003 and averaged 49.3
percent from 2001-2008, encompassing the market bull run and the succeeding global financial
crash. The absolute figures in Figure 11 also confirm this observation.
Figure 10. Local-Foreign Value Turnover Ratio, 1998-2012 (in %)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Aug
2013
Foreign Ratio

Local Ratio

Source of basic data: PSE Trading Participants Ranking Reports

Figure 11. Breakdown of Value Turnover Ratio by Local and Foreign TPs, 1998-2012
(in Php billion)
4,000
3,500
Foreign TP
3,000

Local TP

2,500
2,000
1,500
1,000
500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Aug
2013

Source of basic data: PSE Trading Participants Ranking Reports

However, since the market started recovering in 2009, local support also began to
strengthen, keeping trading activity afloat by averaging about 62 percent share of total trading
value from 2009-2012. Even as foreign funds started to flow as a result of the country getting
upgraded to sovereign investment grade rating, local investors remained steady and kept their
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share at slightly above 50 percent. The earlier mentioned rise of online investors similarly gave
reason for the continued strength of local investment as seen in Figure 12, which shows that
more than half of the online retail investor population consist of young professionals and that
these online accounts are highly active (Figure 13). The market education efforts of the PSE
and its trading participants also helped develop a heightened awareness of the stock market to
a younger breed of investors that had a high risk tolerance.
Figure 12. Online Retail Investors by Age
Group (in %)

Figure 13. Active vs. Non-Active Online

Accounts

Source of basic data: PSE Stock Market Investor Profile Reports

In relation to the trends identified above, one of the more common views about the stock
markets role is that it serves as a leading indicator for future economic performance. Investors
often look to a countrys stock price index to provide an idea on how the economy will perform,
given that the index is representative of the largest companies which operations have a
significant effect on economic activity. A recent study by PriceWaterhouseCoopers (Hawksworth
and Teh, 2013) looked into the US and UK stock markets to see if indeed they act as reliable
indicators for the real economy. To find out, statistical regressions were made using quarterly
real GDP growth, unemployment rates and stock index changes. The results showed US stock
market movements to be strongly related to GDP and unemployment changes one quarter
ahead, taking into consideration the US populations high participation rate in stock market
investing. The Americans consumer spending is seen to be impacted by changes to stock
prices as their direct holdings rise and fall with the movement of share prices. This
demonstrates the so-called wealth effect. On the side of the UK market, the main difference
lies in their investor composition UK stocks are primarily held by institutional investors such as
asset management firms, pension funds and life insurance companies, thus reducing the direct
impact of share price changes. This in turn makes the UK economy take a longer time to
consider stock market movements at about 3 quarters for GDP growth and 12 months for
unemployment rate.
The PwC study also presented another way of looking at stock market movements in
terms of the extent to which growth from one quarter feeds through to the next, which is referred
to as a momentum effect. The results showed that there are high momentum effects in the US
economy, with growth in one quarter feeding through strongly to growth in the next quarter. A
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potential reason cited for this could be related to stock price increases triggering a short term
boost in consumer spending, which will then have an effect on the economy, boosting growth
and reducing unemployment. In the UK, however, the momentum effects had less of an impact
probably due to stock market effects in the jurisdiction operating slowly through business
investment rather than consumer spending as observed in the US.
Meanwhile, Levine and Zervos (2013) observed from cross-country regression results
that stock market development is positively associated with long-run economic growth. Using
pooled data coming from 41 countries during the period 1976-1993, the study analysed the
correlation between stock market and economic growth, which was measured by a number of
control variables such as initial income (logarithm of initial real per capita), initial education
(logarithm of the initial secondary school enrollment rate), a measure of political instability
(number of revolutions and coups), ratio of government consumption expenditures to GDP,
inflation rate, and black market exchange rate premium. On the other hand, overall stock
market development was approximated using a customized index, which included variables
such as market capitalization ratio, total value traded ratio, turnover ratio, and the International
Arbitrage Pricing Model used by Korajczyk (1996) to measure stock market integration.
Stock market development ratios
To better understand some of the ratios used by the Levine and Zervos paper,
descriptions and comparative data are provided. These ratios are used to indirectly measure the
development of a countrys stock market relative to the size of its economy.
Market capitalization (MCap) to Gross Domestic Product (GDP) ratio is usually used to
gauge whether a market is overvalued or undervalued. In general, MCap to GDP ratios above
100% indicate that a market is overvalued, while ratios below 50% indicate that a market is
undervalued. MCap to GDP ratio also measures capital of listed firms at market price multiples
of subscription values, subset of all enterprise with wide variations in value from nominal to
multiples magnified by significance of foreign investments like HK and Singapore. In stark
contrast to low end Shanghai, Shenzhen and Osaka with robust economies in any event.
Figure 13 below shows the 2012 Domestic MCap to GDP ratios of Asian countries,
including the Philippines, and United States of America and United Kingdom, using data
gathered from the World Bank and World Federation of Exchanges (WFE). As seen in the chart,
Hong Kong Exchanges has the highest MCap to GDP ratio at 1,075.2%. The Philippine Stock
Exchange ranked in the middle at 91.6%, while Osaka Stock Exchange ranked the lowest at
3.4%.

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Figure 13. 2012 Domestic Market Capitalization to GDP Ratio (in %)

Sources of basic data: World Bank, WFE

Significant indicators used alongside the MCap to GDP ratio are the value turnover to
GDP ratio and value turnover to MCap ratio, which both measure liquidity. Figure 14 shows the
2012 value turnover to GDP ratio of the same set of countries. Hong Kong Exchanges again
recorded the highest result at 420.1%. The Philippine Stock Exchange was one of the lowest at
13.9%, while Osaka Stock Exchange again recorded the lowest ratio at 2.39%.
Figure 14. 2012 Value Turnover to GDP Ratio (%)

Sources of basic data: World Bank, WFE

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Figure 15 illustrates 2012 value turnover to domestic MCap ratio. Shenzhen Stock
Exchange topped other countries at 206.0%. The Philippine Stock Exchange was second to the
lowest at 15.2%. Bombay Stock Exchange ranked lowest at 8.7%.

Figure 15. 2012 Value Turnover to Domestic MCap Ratio (in %)

Sources of basic data: World Bank, WFE

Figure 16 shows 2012 capital raised to GDP ratio. Hong Kong Exchanges ranked the
highest at 15.0%. The Philippine Stock Exchange placed fourth at 2.0%. Korea Exchange
recorded the lowest ratio at 0.1%, while Osaka Stock Exchange, Bombay Stock Exchange, and
London Stock Exchange did not report any capital raised for the period.
Figure 16. 2012 Capital Raised to GDP Ratio (in %)

Sources of basic data: World Bank, WFE

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The ratios above indicate that, at least for the Philippines, the depth of the stock market
in terms of liquidity and its ability to facilitate capital expansion does not yet reflect the prevailing
stock prices which are currently at expensive levels relative to their peers. But there could
possibly be a rebalancing of such prices in the horizon, as the economy continues to grow and
listed companies become more profitable to justify their stock values.
A 2012 report by Standard Chartered Bank shares a similar view, in that the bank
expects the Philippines to undergo a re-rating process similar to what Indonesia went through
during the period 2006-2010, where the Indonesian markets price-earnings (P-E) ratio
expanded 3.5 percentage points as a result of bright prospects that included strong possibility of
investment grade status, increasing per capita income, and greater investment due to political
stability. From the two charts below, Standard Chartered has observed that the Philippines has
already begun the re-rating process in mid-2010.
Figure 17. Price-Earnings Ratios of Indonesia and Philippines

Source: Standard Chartered Equity Research

The research noted though that the key question remains if the likelihood of earnings
growth by listed companies can expand faster than the market forecast in the next two years.
Another study examining stock market development and economic growth was
conducted by Mohtadi and Agarwal (1998). The paper looked at 21 emerging markets, which
included the Philippines, from 1977-1997 and found a positive relationship between the two
indicators using two models to estimate long-run effects. It should be noted, however, that the
study did not present results on a per-country basis, and just considered the overall results for
the emerging markets data set. The first model utilized two steps to test whether the stock
market indeed has an effect on economic growth. Real investment as a fraction of GDP was first
regressed on three stock market variables, namely market capitalization ratio, total value of
shares traded ratio, and turnover ratio. The second step involved regressing a growth variable
derived from the World Development Indicators (2000) data set against the fitted value of
investments, foreign direct investment (FDI), GDP, and secondary school education. Based on
the results, turnover ratio, FDI, GDP, and fitted investment all showed strong positive influence
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on aggregate growth. Model 2, meanwhile, had a more direct approach in analysing the
relationship between stock market development and economic growth instead of looking at
investment behaviour. The growth variable from Model 1 was regressed against the variables
used in the same model. However, the results showed that turnover ratio, FDI and secondary
education were statistically significant and had positive relationship to growth.
Mohtadi and Agarwal further noted that different ratios were highly significant for the two
models for the two-staged model, the market capitalization ratio was the significant stock
market indicator while in the direct test model, turnover ratio served as the significant stock
market indicator. A possible interpretation for this result is that for model 1, a large-sized stock
market can lead to higher investment opportunities, showing market capitalization to be a better
instrument to represent investments. On the other hand, model 2, by controlling for investment,
reduces the significance of market capitalization.

IV. Conclusions
Historical data has presented that while the local stock market has been growing, it has
not expanded at a pace quick enough to match its counterpart markets. While one may point to
a variety of reasons, these can all be interrelated and has causal effects to other growthhindering factors. Consider, for example, the low awareness and negative perception of the
stock market investing that have been pervasive issues which continue to keep investor levels
low. Possible root causes to think about here are past events of stock price manipulation that
have deterred investors from returning; lack of understanding of how the stock market works
and the investment risks that it carries, which in turn has pushed Filipinos toward safer channels
such as bank deposits, and in worst cases, even led them to spurious investment vehicles that
promise high levels of return only to eventually run away with the investors money; or the lack
of products in the stock market that in turn do not really offer a lot of options to invest in.
The more recent data, however, has shown us that there could be a possibility for a
monumental change in the way people invest and save. Information these days are becoming
easier to look for through the internet, and this aids in reducing the uneven access to
information that markets usually encounter. Schools also offer stock market topics now and the
Commission on Higher Education has gone a step further by implementing CHED Memorandum
No. 39, which institutionalizes a capital markets subject for all students taking a business
administration major. As Filipinos and even foreign investors become more educated and aware
of the opportunities and risks in investing in the Philippines, the overall market maturity should
rise along with them. However, further development in the stock market still lacks a clear
indication of whether it can move much faster, if it is to catch up with its regional peers. In this
sense, the stock market could indeed be representative of the countrys economy, which has
been left behind, though hopefully now on track towards achieving not just higher but more
sustainable growth.

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REFERENCES
BSP Department of Economic Statistics. Consumer Finance Survey 2009. Bangko Sentral
ng Pilipinas. www.bsp.gov.ph
Hawksworth, J. and Teh, Y. 2013. Are stock markets reliable leading indicators of the real
economy for the US and UK? PriceWaterhouseCoopers Economics Consulting
Services.
Larrain, B. 2005. Stock Market Development and Cross-Country Differences in Relative
Prices. Pontificia Universidad Catlica de Chile.
Levine, R. and Zervos, S. 1996. Stock Market Development and Long-Run Growth. The
World Bank Economic Review, Vol. 10, No. 2.
Mohtadi, H. and Agarwal, S. 1998. Stock Market Development and Economic Growth:
Evidence from Developing Countries.
The

Philippine Star. Merrill Lynch still top broker in RP. June

http://www.philstar.com/business/86337/merrill-lynch-still-top-broker-rp

The Philippine Stock Exchange, Inc. www.pse.com.ph

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7,

2001.