Shaken, not stirred
With new lows, it is not surprising that the local equity market, as reflected by the Philippine Stock Exchange Index, is finding it difficult to find its way back to 6,000.
“The World Is Not Enough” is the family motto of the fictional master spy James Bond, created by writer Ian Fleming.
While the movies and the character may be criticized for chauvinism or borderline toxic masculinity, one of the things that makes James Bond such an entertaining piece of fiction is its ability to imagine geopolitical themes and technological trends and frame them as geoeconomically motivated. While fictional, it is a good exercise of the imagination to see what is possible.
Over the past few weeks, we have seen an exchange of communications between the Chinese embassy and its cohorts, on one hand, and the leadership of Philippine defense, maritime law enforcement and safety, and foreign affairs, on the other.
Given that these communications are at a diplomatic level, we should take them seriously. The central issue is whether China has diplomatically threatened the Philippines with the possibility of conflict and how we would respond to this perceived threat. Without commenting on the merits of either side, what is observable is an escalation.
However, it is hard to say whether tension is really growing. What we may be seeing is signaling on China’s part — and we may not be the audience. Rather than seeing only the tit-for-tat exchange, there is a bigger picture. For one, the ASEAN Summit will be held in the Philippines in November, and we are expecting no less than US President Donald Trump to visit during this period.
Perhaps the recent escalation in exchanges is meant to expand the conversation, given that the ASEAN Summit is a prelude to an expected US-China meeting on the sidelines of the Asia-Pacific Economic Cooperation (APEC) meeting in Shenzhen.
In this big picture, regional risk adds to the factors behind the growing weakness of the Philippine peso. The currency hit new lows in September and again just last week in October. While there are other factors, such as oil prices, which are gradually climbing, rising interest rates and a strengthening US dollar, we can say geopolitical risk potentially adds to the peso’s downward trajectory.
With new lows, it is not surprising that the local equity market, as reflected by the Philippine Stock Exchange Index (PSEi), is finding it difficult to find its way back to 6,000. Given the tough climb, what are the options for investors?
We should consider diversification into bonds. With inflation gaining in many parts of the world, bond yields have been rising as well. The 10-year US Treasury bond yield has risen to its highest level in 24 years this month, at over 5.0 percent. In the Philippines, the yield on the same tenor has risen to an eight-year high of over 8.0 percent.
Japan’s 10-year Treasury yield has risen to a 30-year high of over 3.0 percent. While there are other factors to consider when investing in bonds, they do offer some yield protection or enhancement amid uncertainties in other financial markets.
Investors may very well need to take lessons from the espionage world as portrayed by James Bond. Not so much in the sense of spying via listening devices and securing moles, but rather in the science (or art) of scenario analysis in futures thinking with respect to geopolitics and geoeconomics.
It takes a lot of imagination to see a world that may seem improbable. Keep in mind that financial markets often behave very much like how James Bond likes his Vesper martinis: “shaken, not stirred.”