Australia-Philippines military pact sealed this week

When the Financial Times says “sentiment has improved (for the Philippines) on several fronts,” I take that as something good for us in the short term, at least. But what does sentiment really mean? Can we ride on sentiment towards tiger economy status?

The dictionary defines sentiment as “a group of emotions and opinions associated with and aroused by an idea; susceptibility to emotional appeal.” Even in love, sentiment alone doesn’t sound like a good basis for any important decision. Same thing has to be true when deciding to risk money in a market or in a business.

The boom atmosphere we have today is brought about by so much money looking for some place to go. And sentiment seems to be what’s guiding many investors in many world markets. Sometimes it is called herd mentality working up a bubble. And it could be as deadly as the rush to the exit in a crowded theater on fire.

That’s probably what was worrying Allan Greenspan when he made his comment about the Shanghai stock market. The great central banker of the 90s was expressing concern about asset bubbles in China only to be ignored by the Chinese investors. The Shanghai market merely made a very slight correction, 0.5 percent.

A market analyst interviewed on Bloomberg television explained that the Shanghai market is essentially a retail market with a lot of ordinary folks who haven’t heard of sophisticated valuation techniques. They don’t even know who Greenspan is and couldn’t care less what he thinks of their market.

The Chinese are investing in the Shanghai stock market merely on the basis of sentiment. Many of them have been riding the positive sentiment for over a year now and have been making good money too. In the absence of too many investment options in China for these rising middle class folks, the analyst told Bloomberg TV they couldn’t be blamed for disregarding professional worries about the so-called bubble.

The same thing could be happening here now. We don’t have enough local stock market investors. Our stock market is moved only if foreign investors come in and it doesn’t take much to move it. Hot money is definitely pouring in our market for it to be as lively as it is now.

True enough, foreign portfolio investments registered at the Bangko Sentral ng Pilipinas posted a net inflow of $243.10 million in April. This is 40 percent higher than the $173.21 million recorded in March and a 140 percent higher than the net inflow of hot money in April last year.

Dictionaries may define sentiment as basically emotional, but riding it now is a joy. All of a sudden, my modest portfolio of blue chips has tripled in value. But you must always be conscious of the continuing risks. Foreign investors who are here now can be gone in the next hour, as they follow their sentiment. Right now, we are the flavor of the month, one of the world’s best performing markets. In the euphoria, not too many of us locals have even thought about Shanghai.

Why should we worry about Shanghai? Ate Glue says our economic fundamentals are great. What has Shanghai got to do with our market?

Sentiment, that’s what. There is a small portion of the Shanghai stock market accounted for by foreign investors, the kind of investors who are also here. The slight downward movement after Greenspan made his comment is most likely accounted for by some foreign investors in Shanghai who took that as a signal to start worrying about the market. If something happens that will make them leave Shanghai in a panic, they’d be in a panic mode too about our market and every emerging market in the globe. That’s also called sentiment.

There are a lot of things driving sentiment. The positive sentiment towards China is driven by its tremendous growth and potential. But there are threats to all that too. The US has already brought charges against China before the WTO. The US Congress is threatening a rise on tariff charges against Chinese goods unless there is a dramatic revaluation of the yuan. Sentiment can reverse overnight from events arising from all these and other unforeseen developments.

Notice how the rest of the world reacted to the 9.2 percent plunge in Shanghai last Feb. 27. But lucky for us and the world, that was quickly reversed. But the next one may not be that benign. Greenspan said last May 23 that stocks in China face a “dramatic contraction.” Greenspan is known to choose his words carefully. He’s probably more worried than he lets on.

For us, a reversal of sentiment in China is likely to have a negative impact. China’s economy is our engine of growth in the region. If China stalls, we and our “hot money” investors will know we are in trouble as well.

Portfolio (or hot money) investor sentiment is volatile. What makes it more so for us is the fact that our economy is still pretty fragile, no matter what Malacañang says and whatever confidence some of our local traders may express in BSP surveys. A lot of hot money in the stock market and an extremely strong peso may both look good in a Malacañang press release but are not good indicators of a sustainably strong economy.

We should not lose sight of the fact that there are troubling signs in our economy that are still to be addressed. Output of our country’s manufacturing sector, as measured by volume of production, continued to decline, dropping by 7.6 percent in March from a year earlier, the National Statistics Office reported last week. The volume of production index (VoPI) of -7.6 percent in March followed the VoPi of -13.9 percent in February and the -0.4 percent VoPI in January.

The manufacturing industry said its weakening output performance was a natural consequence of its many problems with competitiveness. Donald Dee, a member of the Competitiveness Council and chairman of the Philippine Chamber of Commerce and Industry (PCCI), said the negative effects of globalization have been felt most by the local manufacturing sector, which he said was seriously challenged by the high cost of doing business.

The normally administration friendly Dee also noted “because of high cost of manufacturing, in some cases, it has become cheaper to import goods than produce locally.” Dee said other factors — which he called “inefficiencies in the economy” that makes importing cheaper than manufacturing — are high transaction cost and poor infrastructure.

According to the National Statistics Office, manufacturing indices in March again slipped, with major sectors posting double-digit output contractions during the month.

Preliminary results of the Monthly Integrated Survey of Selected Industries (Missi) showed a 5.2-percent decline in the Value of Production Index (VaPI), its fifth month of contraction, while the Volume of Production Index (VoPI) posted a 7.6-percent decrease year-on-year. VoPI has been declining the past 14 months, the National Statistics Office (NSO) noted.

As such, it is also worrisome that the Philippines’ trade deficit widened to $119 million in March from $10 million in the same month last year. Sure, the OFWs are continuing to break records in remitting billions of dollars to the country and the BPOs are doing well. But unless we have a good manufacturing base, we will have to depend on positive sentiment to deliver the good news about economic growth. Many economists are saying we cannot just ride on call centers and BPOs for sustainable economic growth and forget manufacturing.

Oh well… for now, it is alright to ride with pure sentiment. But don’t believe Malacañang’s press releases too much and forget the attendant risks. Sentiment, after all, has a flip side.

Socrates

Robin Tong sent this one.

Socrates was once asked, “What is the cure for love at first sight?”

He replied, “Take a closer second look”.

Boo Chanco’s e-mail address is [email protected]