[ANALYSIS] Waking up PSE from its stupor: More on strategies to enhance market development 

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It’s good the Philippine Stock Exchange (PSE) has set into motion an effort to initially look into its listing rules to stimulate greater market activity.  

This news came a day before the trading blood bath on January 31, Friday two weeks ago, but not after the recent uproar over its continuing weak performance and poor leadership to drive market growth.  

The criticisms particularly revolved around the PSE’s weak focus on its commercial functions — not to mention its concomitant shortcomings in its regulatory duties to instill market confidence — in order to cultivate a robust investor base and create a wider range of investment opportunities.  

Paramount in the criticisms is that there has been a consistent pattern of decline in average daily value turnover in the last five years. From an average daily market transaction of P9.0 billion in 2021, this decreased to P6.1 billion in 2024, or a decline of 32.22%.

If not for anything, the January 31 market fall was but a glaring wake-up call again from the PSE’s seeming obliviousness, complacency — or pure incompetence — to address the continuous decline of the market’s total value turnover.  

Incidentally, the PSE is reported to be again one of those with the lowest market activity among its ASEAN peers. It was also ranked last in a survey on capital raised from primary offerings for 2024. Total capital raised was P75.78 billion only.

Conversely, it was just unfortunate that investors had to suffer, once more, due to overdue efforts to strengthen the capital market. Imagine, the market price of the 30-component stocks of the main index fell that day by an average of  4.01% or 245.07 points, so much so that this could have ushered the possible onset of a bear market considering that the market drop may have been tantamount to a 20% fall from the market’s October 2024 high.   

A market is generally considered to have entered a bear market phase when prices have declined by at least 20%. Bear markets can be also as short as a few weeks or as long as several years.

Good thing, when trading closed at 6,154.99 on February 7, Friday last week, with a weekly gain of 4.99% or 292.40 points, the market was able to significantly trim down its year-to-date (YTD) losses of 10.20% or 666.20 points the week before to just negative 5.73% or 373.80 points.  

Nevertheless, the PSE’s YTD average daily value turnover has further gone down to P5.84 billion, or by another decline of 4.26%.  

The barriers

Accordingly, the PSE is now reviewing its schedule of charges and penalties on listing violations in its new effort to look for ways to attract more companies for listing and help bolster market activity.  

The charges and penalties imposed on listing violations has been a barrier resulting in the low participation for listing in the past. Today, they are still an issue, especially for family-owned companies. They are still deemed too high.  

The PSE may expand this to review its rules for access to financing. They are found demanding. Companies could simply borrow when they are private. This changes when they get listed. They have to go through the hustles of the rules imposed on listed companies for financing.   

Another is for the PSE to reassess its listing process. It is criticized to be too long and slow. This brings the need for the PSE to reconsider streamlining its listing process. There is one suggestion that looks laudable for the PSE to apply. This is to “implement a single listing submission process together with a three-month commitment for IPO approval.”      

The PSE’s listing requirements is also still seen to be comparatively hard. Excerpts from recent studies continue to describe the PSE’s listing rules to be “still difficult and less flexible among its ASEAN peers.”  

For instance, listing fees remain relatively high and that the fee structure is comparatively complex. This goes along with the present IPO tax and stamp duty taxes. They had been a damper in the appeal to go into initial public offerings (IPOs). 

As pointed out in an earlier commentary, the PSE has failed to exert more effort in the development of the Small and Medium Enterprises (SME) Board. To this day, it has not grown and is still in its nascent state. Promoting the listing of more SMEs could materially contribute in the increase of domestic participation and development of a wider and deeper investors’ base.    

In summary, the PSE should make a more comprehensive review of its listing rules and procedures, giving closer attention to the forgoing observations to encourage listing, especially that we have now a growing number of companies with clear growth potentials.  

Investment developments and opportunities

Speaking of investment potentials, we had a very interesting forum last February 10 in our Monday Circle. Our special guest and resource person was Paulo Campos III, the founding managing general partner of Kaya Founders, one of the leading early-stage venture capital firms in the country.  Kaya Founders invests in the next generation of high-impact enterprises in the Philippines and across Southeast Asia.  

The fund has over a billion pesos in assets under management and has made over 45 investments today in startups ranging from e-commerce, logistics, healthcare, fintech, B2B Saas, and a number of other technology endeavors.

One of the early projects incubated by Campos into a full-blown profitable enterprise today is Zalora Philippines, the largest fashion e-commerce marketplace that also boasts of receiving a strategic investment from the Ayala group of companies. Campos actually co-founded Zalora, whose parent holding company had an IPO debut in the Frankfurt Deutsche stock exchange in Frankfurt, Germany in July 2019.

Campos reported that the Philippines is becoming a very exciting investment destination. There are new generation of enterprises that have been created and are thriving, attracting investment interests even from countries like Singapore, Indonesia, and Vietnam.  

Above all, it has leap-frogged in technology driven businesses due to the country’s population that boasts of a strong demographic advantage and adeptness in the use of technology that has given rise to new big enterprises like Lazada, Shopee, and Zalora. In its Cavite warehouse alone, Zalora is moving at least 2.5 million items. [READ: Do malls, online shops mix? Zalora says Pinoys have best of both worlds]

There are also companies now that are created by those whom he calls “sea turtles,” Filipinos coming back who worked abroad and excelled in their respective fields.  

Campos cites a software and hardware startup that offers business-oriented products and services that has the potential to rival Oracle’s business in database software, cloud computing, and enterprise software services in healthcare, BPO industry, and agriculture, to name three. There is also a database software company put up in Catbalogan, Samar by a “sea turtle” for a sari-sari store operation. At the moment, it has at least 250,000 clients nationwide, and growing.    

Also, we have tech companies that could help simplify and manage the operation of government units and agencies like the Bureau of Internal Revenue (BIR) to increase its collection and efficiency to collect, among others, or streamlining PhilHealth’s transactions and proper accounting of its financial status.  

Then, we have new enterprises created by foreigners wanting to relocate and live permanently in the Philippines either because of their marriage to Filipinos or enamor to the country’s charm and natural hospitality. We have seen this happening in the tourist industry.

From Campos’s revelations, we have an abundance of companies that can make us competitive as an attractive investment destination and source of diverse companies for public listing.  

However, the country must first accept the fact that it needs to manage corruption and bureaucratic red tape, like for the PSE to man up to admit its poor performance and leadership failure and change its restrictive listing rules.   

Structural changes and more

For instance, the PSE should shed itself of being just like a store keeper (or taong bahay) and must be more managerial as in to literally help follow up the passage of bills into law aimed to improve the Philippines’ competitiveness in the capital markets.  

At present, we have the Capital Markets Efficiency Promotion Act or CMEPA bill and the proposed Passive Income and Financial Intermediary Taxation Act or PIFITA that are crafted to improve market efficiency, attract investments, and broaden participation. They are purposely designed to simplify tax rules, reduce certain taxes such as the Stock Transaction Tax (STT), setting reforms and harmonizing tax regulations, granting tax exemptions for collective investment schemes relative to the taxation of passive income and financial intermediaries involving the banking, insurance, equities, and debt bodies. These bills are currently either awaiting passage or ratification in the Senate. 

The reduction of the STT to 0.1% from the present rate 0.6% along with the other tax incentives proposals in the bills could spur market activity and boost liquidity in the Philippine stock market and align the tax rates of the Philippines with neighboring ASEAN countries to attract more investors.

The PSE has no strong suite of marketing expertise. So far, the PSE hierarchy has a paucity of this background. It does not even have a separate unit to simply monitor and evaluate the number of unlisted large companies that have both reached listing criteria and have outperformed listed ones. The PSE could start with the list of the first 1000 top corporations of the country.  

Going back to the subject of increasing liquidity and attractiveness of the local stock market, the PSE could introduce a special program to support the listing of large unlisted companies and large state-owned enterprise (SOEs). It should also modify its policy of limited access to research and market makers. It should open up its database and studies on listed companies to the investing public, free of charge.  

Furthermore, the PSE should:

• modify its policy to take away low free-float levels that adversely affect index inclusion and investor interest 
• establish a minimum payout ratios and incentives for companies to deliver higher value to shareholders
• modify the regulatory framework for the development of a derivatives market which can help stir market activity.

Unkindly described maybe, it is undeniable that the PSE has done poorly in the last five years. The PSE has to change its present organizational shade. Otherwise, it might again miss out from the investment opportunities reported by Campos.    

By the way, “Happy Valentine’s Day!” – Rappler.com

(The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise.  Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity.   You may reach the writer at densomera@yahoo.com)