The formal Philippines capital market is one of the oldest in Asia. The Manila Stock Exchange was established in 1927.Gold and copper mining stocks dominated trading during the first five decades of operation, and trade in oil stocks caused a boom in the late1970s. A rival financial group established a second stock exchange in 1963. After years of conflict, the government induced the two exchanges to merge in 1994 to form the Philippines Stock Exchange (PSE).
The stock market took on increasing importance in the late 1980s. In the five-year period beginning in 1987, total market capitalization grew from $3 billion to $14 billion. The stock exchange is owned by its 185 broker–dealer members. Their representative’s control the PSE board of directors. Because there is equal voting power among dealers, the more numerous small brokers tend to control board decision-making.
Since the 1980s, emerging stock markets have been widely seen as the most exciting and promising area for investment, especially because they are expected to generate high returns and to offer good portfolio diversification opportunities. Consequently, these markets have known a considerable expansion. Indeed, financial liberalization has been largely implemented in several emerging countries through on-going structural adjustment programs.
As a prerequisite to the financial liberalization processes, stabilization policies have been designed to ensure macroeconomic stability, low inflation and reduced budget deficits. As a result, emerging market capitalization has grown from 4% of world market capitalization in 1987 to 13% in 1996 and was around 20% in 2000 in Philippines.
A large number of Asian emerging markets have launched a series of reforms in the last few years, including the modernization and liberalization of their markets. As a result of these developments and of the important consequences of financial liberalization on International capital budgeting and investment, the integration of the Asian stock market has emerged as an important body of literature. However, the intensity and efficiency of these reforms differ from one country to another.
For cultural and historical reasons, the Philippines are probably the most welcomingcountry of the Asian region for the western businessman. The Philippines trade openness ratio reached an average of 119% over the last decade. This is essentially due to the good functioning of the ASEAN (Association of South-East Asian Nations) created in 1965 by five countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand).
In order to promote its integration into other international stock markets, the Philippines market has recently undergone several reforms: liberalization and privatization (since 1985), introduction of American Depository Receipts (ADR) and country funds (1989). Therefore, the Philippine stock market is expected to be better integrated during the post-liberalization period than it was during the period prior to the opening of its market.