Philippine Business Magazine: Volume 8 No. 5 - Capital Markets
Terror Hits Trading
Terrorist attacks in the US pulled down the Phisix to levels not seen since October 1991
By Tina Arceo-Dumlao

The terrorists that hijacked American commercial airlines on 11 September did more than damage the Pentagon and destroy the twin towers of the World Trade Center. They also succeeded in putting the equities and financial markets of the rest of the world into a tailspin. The United States, after all, is the primary market for exports of Asian countries and emerging markets and their number one source of investments. Hit the United States and you hit the developing economies, the Philippines included.

The pinch was even more felt because the United States, Europe, and Asia were already in the midst of an economic slowdown. For a long time, the Philippine equities market has been in the doldrums, causing many stock brokerage firms to either cut employee salaries, retrench, and even close shop. The 11 September attacks exacerbated the situation, which analysts say can be compared to the Asian currency crisis of 1997 from which many economies are still recovering from.

Data from the Philippine Stock Exchange showed that the Philippine composite index (Phisix) was trading at 1,333.03 points on 7 August, just a month before the 11 September attack. The index closed at 1,262.91 points at the end of September. When news of the unprecedented terrorist attacks came to the Asian markets, the Phisix dropped to 1,294.09 points on the 11th and further down to 1,241.39 points the following day, as investors scrambled to take out their remaining funds from the equities market. As the United States prepared for a long-drawn out battle against Afghanistan and the first air strikes commenced, the Phisix promptly dove to below the 1,000-point psychological limit to settle at 990.03 points, a level not seen since October 1991.

The Asian markets were the first to open after US President George W. Bush announced the US-led military strikes against Afghanistan. Asian stock market prices fell immediately as regional markets would continue to be plagued by uncertainty over how long the action would continue and how far it would spread. Even the most stable of Asian economies felt the withdrawal of funds. Japan’s Nikkei index dropped from 2,027.79 points in August to 1,498.80 on 28 September. Hong Kong’s Hang Seng index plunged from 12,007.19 points to 9,950.70 points during the same period.

Singapore’s market index slid from 1,657.11 points to 1,319.53 points and further down to 1,395.74 points on 11 October.

For the Philippines, the stock market is further weighed down by internal factors such as news that the Abu Sayyaf, the Philippines’ own terrorist group, has again bombed a number of hotels in southern Philippines and has proudly declared links with prime terror suspect Osama bin Laden.

Vulnerable
Investment research, however, indicated that the Asian market was vulnerable to start with, making the 11 September attacks the last nail in the coffin, so to speak. Goldman Sachs says — in a report on Asia-Pacific released 8 August — that 2001 “will mark the deepest downturn in at least 20 years, second only to the collapse in growth in 1998 during the Asian financial crisis.” “The issue for markets will be the quality of the recovery. On our forecasts, 2002 will mark the weakest performance on record in terms of a rebound from a cyclical trough.” Goldman Sachs, thus, was prompted to further downgrade projections for Gross Domestic Product growth in Asia. For the region, Goldman Sachs expects a growth of only 4%, opposed to the 5% projection made earlier in the year.

For individual countries, the most significant downgrades were made for Singapore, Malaysia, Taiwan, and Hong Kong. The projection for the Philippines, however, was kept at 1.7% for the year and 2.2% for 2002. Goldman Sachs explains that the Philippines is not as exposed as other countries like Korea and Singapore to the bottoming out of the semiconductor industry in the US.

SalomonSmithBarney, meanwhile, believes the Philippines continues to be plagued by a weak economy. The Citicorp investment arm states in a 5 September report on the Philippines that a protracted US weakness, lack of broad-based sources of growth, fiscal spending prudence, and a tight money policy would restrict GDP growth this year. “Based on our forecast, GDP growth will remain strained in the second half of the year, bottoming in the third quarter before trending up by fourth quarter. With an improvement in sentiment expected by the first quarter 2002, we forecast a recovery in underlying pre-provision profits in the second quarter 2002,” the report discloses. The expected recovery is now surely pushed back following the 11 September attacks.

Any Hope?
Given the continuing attacks in Afghanistan and President Bush’s statements that “it will be a long war ahead of us,” what is in store for the equities markets? The Global Securities Research and Economics Group of Merrill Lynch and Co. says that the markets would remain unsettled until it gets a grip of the situation in Afghanistan. With this outlook, it is better to be cautious and short-term in investment strategy. “Until business and consumers have a better understanding of the nature of that response and its consequences, the markets and the economy will remain unsettled,” the report concludes.