9 Ways Foreign Investors Affect the Philippine Stock Market
Do you check whether foreign investors are net buyers or sellers in your Philippine stocks?
Net foreign investment in a stock, often referred to as “foreign ownership” or “foreign participation” in a company’s shares, is an important metric for several reasons. Here are some of them:
Diversification of Ownership
A significant level of foreign investment in a stock can indicate that the company is attractive to investors from around the world. This diversification of ownership can be beneficial for the company as it reduces its reliance on domestic investors and can provide stability in times of economic or market volatility.
Access to Capital
Foreign investment can provide a company with access to a broader pool of capital. If domestic investors are not providing sufficient funding, foreign investors can step in and help finance the company’s growth and expansion.
Market Stability
Foreign investors can help stabilize a company’s stock price and overall market performance. They often bring in a longer-term perspective and are less likely to be influenced by local market sentiment, reducing the potential for extreme price fluctuations. PSE bluechips are often the go-to stocks of foreign investors in the Philippine stock market.
Increased Liquidity
A higher level of foreign investment can lead to increased trading activity in a stock, improving its liquidity. This can benefit both existing shareholders and potential investors by making it easier to buy and sell shares. However, I’ve noticed that their participation is no longer as much as pre-pandemic days. Today, it’s no longer just about the aftermath of the pandemic, but also of other economic reasons.
Information Flow
Foreign investors bring with them a wealth of information and analysis about global markets and industry trends. This can enhance the overall information available to the market about the company, potentially leading to better-informed investment decisions.
Currency Exchange Impact
Foreign investment can also expose a company and its shareholders to currency exchange rate fluctuations. If a significant portion of a company’s shares is owned by foreign investors, changes in exchange rates can impact the company’s financial performance and the returns received by shareholders. In the Philippines, foreign investors are allowed to have full ownership, up to 100%, of a domestic market enterprise, whether or not its shares are listed on the Philippine Stock Exchange, as long as the enterprise does not engage in any of the activities listed in the Negative List of the Foreign Investments Act of 1991, as amended.
Then President Rodrigo R. Duterte signed into law the Republic Act 11647 amending the Foreign Investment Act (RA 7042). Details are published in the Official Gazette of the Philippines.
Regulatory Considerations
In some countries, there may be regulatory restrictions on the level of foreign ownership in certain industries, particularly those deemed critical to national security or strategic interests. Companies must be aware of and comply with these regulations. Limitations are also found in the Republic Act 11647.
Corporate Governance
The presence of foreign investors can sometimes lead to improvements in corporate governance. They may demand greater transparency, accountability, and adherence to international standards, which can benefit all shareholders.
Risk Management
Diversifying the shareholder base by attracting foreign investors can be seen as a risk management strategy. It reduces a company’s dependence on the economic and political stability of its home country.
The importance of net foreign investment in a stock lies in its potential to bring diversification, capital, stability, and global perspective to a company, while also posing certain risks and regulatory considerations that need to be managed effectively. The level of foreign ownership can be a significant factor in assessing a company’s attractiveness to both investors and analysts.
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