Stock Market Activities: How it affects the Philippine Economy

In capitalist economies, stock markets are one of the ways one could transform their savings into capital. Stock market basically operates in the value of the risk: the greater the risk the greater the return. It is not only important because of the household wealth that is invested inside but because it lets the investors to change the future of the company by patronizing the stocks or not. Therefore, risk-taking and stock purchasing in the stock market have the capability of predicting and embodying events that have not actually or may eventually occur. In accordance with this, stock markets can reflect the aspects overall of the economy, when the stocks of most important enterprises in the economy are being traded. However, since the futurity of the stock prices are difficult to measure, investors use their own decisions, gut feel and speculations to protect their own household wealth. Therefore, in the course of the market wealth is created and destroyed. Now, stock markets are not only played by old companies or investors, everyday, hour or even minute, new investors and stocks come in, whether created by newly established corporations or existing corporations answering their finance needs. This situation balances the decrease and increase of wealth by bidding up prices of existing stocks, thus propelling entry and speculation. Moving on to the context of New York Stock Exchange fall, Dow Jones Index are based on the prices of blue chip stocks. It was the longest "bull market in the history" and it was surprising how the US have plummeted, considering that in the start of 1987 DJIA is 1,927.31. Suddenly it went up to 2, 201.49 on February 5, signaling the high probability of return among those who invested and for those who might want to invest. It retained its constant growth until it reached its time of peak from August 17 having 2, 700.57 to its highest on August 25 as 2,722.42. As suddenly as it came up, it also came down to 508 points on October 19, 1987. To further illustrate the sudden change in the New York Stock Exchange, observe the graph below.

October 19, 1987 was named as "Black Monday", one of the most memorable days in the history of stock market. Black Monday was also present in other countries such as Hong Kong, Canada, UK and other parts of the world. From Hong Kong's point going westward, established countries have experienced Black Monday; they halted their stock exchange for an hour or more and some even closing for the whole day, to give the investors some time to think their stand. In the Philippines, our stock market and economy were also affected by the NYSE crash. However, the impact did not superficially affect the Philippine Stock Exchange, for it did not close its operations for a day or for an hour. Our local stock market, Philippine Stock Exchange will echo the crisis in Wall Street, but probably in a lesser degree according to Dr. Manuel Montes, an important associate of the Central Bank of the Philippines. He analyzed that the effects will be as a (1) decrease in the revenues of the Philippine exports due to the slowdown in economic growth in the United States and other major countries; and (2) the value of Philippine Peso will be affected by dollar changes. The Phisix or the Philipine Stock Exchange composite index is the main stock index of the Philippine Stock Exchange on also its only broad-based index. It comprises the most prominent and major Philippine companies listed on Philippine Stock Exchange. Some of these companies are Ayala Land, Ayala Corporation, Filinvest Land, Globe Telecom, GMA Network and etc. Since almost all of the biggest companies in the Philipines are listed here it is the indicator of the Philippine economy.

The Top 15 Largest Movements in Phisix (July 14, 1987 May 25,2003)

To illustrate the change in the Phisix during the Black Monday, refer to the Table above. One will see that on the same day of the Black Monday (October 19. 1987) the Philppine Stock Exchange dropped by -0.1187. This signifies that we are indeed affected by the NYSE crash. To fully discuss what Dr. Manuel Montes claimed, Philippine revenues on exports will decrease due to cut-offs of America on importation. Not only that, other countries that suffer the same problem in their stock markets, such as Hong Kong, Germany, UK and etc. may also exercise importation cut-offs, so it may also hurt our revenues in exporting products. Another claim of Dr. Manuel Montes said that Philippine Peso will be affected as we are pegged with the U.S. dollar. If the U.S. dollars value will decline due to the NYSE crash, therefore the Philippine Peso will also decline in value. SOURCES: Aquino, R. Q. (2004). News, Noise and Stock Movements. Research, University of the Philippines, Diliman, College of Business Administration, Queson City. Montes, D. M. (1988). The Implications of Stock Market Crash and the Philippine Economy. Development Research News , VI (1), 1-5.