Is PSE investor participation declining?
Many investors look at the stock market and see very little activity. The Philippine Stock Exchange Index (PSEi) has spent long periods near the same level, with occasional rises and declines but without the kind of sustained momentum that usually excites investors.
To many observers, the market appears quiet, even stagnant.
Yet the calm appearance of the index can mislead. Some stocks rise strongly, others decline, and many do so for reasons that have little to do with the market itself.
A deeper look at individual stock performance often reveals a story that the index alone cannot show.
In portfolio management, a stock’s return can be divided into two parts. The first is the portion explained by the overall market. Most stocks move with the market to some degree, and this relationship is measured by beta. A stock with a higher beta tends to move more than the market, while one with a lower beta tends to move less.
The second component is the idiosyncratic return. This is the part of a stock’s performance that the market cannot explain. Company-specific factors often account for the difference such as earnings surprises, large institutional trades or changes in investor confidence.
For example, Ayala Land (ALI) has a beta of 1.6 and the PSEi declines by 0.9 percent. Because ALI tends to move about 1.6 times the market, the expected decline would be roughly 1.4 percent.
If the stock instead falls by 23 percent, the difference, which is about 21 percent, is the idiosyncratic return. The market alone cannot explain the move, so company-specific factors must account for it.
Now, if we calculate the idiosyncratic portion of stocks in the PSEi, we gain a clearer picture of capital flows within the market. The index may appear calm, yet individual stocks may diverge sharply from one another.
A look at the idiosyncratic returns of the PSEi components over the past three years shows that the internal structure of the market has changed significantly.
In 2024, the PSEi declined by about 1.8 percent. The market appeared relatively stable, yet the dispersion of idiosyncratic returns reached an extraordinary level of about 45 percent. This means individual stocks behaved very differently from one another. Some companies produced returns far beyond what the market alone would predict.
Stocks such as DigiPlus recorded a remarkable surge, while Converge, China Bank and ICTSI also produced unusually strong company-specific gains. At the same time, other stocks declined sharply.
The median idiosyncratic return for that year reached roughly positive 13 percent, which indicates that many stocks performed better than their exposure to the market would suggest. The market environment therefore reflected strong speculative activity.
The mood changed in 2025. The PSEi declined by about 7.3 percent, while dispersion fell sharply to roughly 21 percent, which was about half the level of the previous year. The median idiosyncratic return moved close to zero. The extreme winners and losers of the prior year began to normalize. Stock performance became less dramatic and less widely dispersed. This suggested that the market had entered a correction phase not only in price but also in behavior.
The trend continued in 2026. The index has moved very little so far this year, with a decline of less than 1 percent. Dispersion has fallen further to around 12 percent, while the median idiosyncratic return has declined to about minus 4 percent.
These figures mean that stock movements show less extreme divergence than before; yet most stocks now perform worse than their beta would suggest. In practical terms, the market depends on a relatively small group of strong companies, while many others lag behind.
Among the stocks with strong positive idiosyncratic returns are ICTSI, Monde Nissin, JG Summit, Puregold, Meralco and ACEN. Their outperformance suggests steady investor confidence in these companies despite the weak market environment, while many other stocks struggle to keep pace with the market’s expectations. This reflects narrow leadership, where a few large companies hold the index steady while many others lag behind.
Yet the current environment raises an important question: what happens next? Markets with narrow leadership rarely remain stable for long. When only a small group of stocks supports the index, the market becomes more fragile. Rising uncertainty may push investors to concentrate capital even further in a handful of perceived safe companies while many others continue to lose investor interest.
At the same time, such conditions can create opportunities. When capital concentrates narrowly, many stocks may trade below what their fundamentals justify.
In a market that has become more selective, disciplined stock selection and careful analysis of individual businesses may matter far more than simply following the direction of the index. This may also force investors to focus more on business quality, earnings strength and long-term value rather than short-term market momentum.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 116th batch of RFP Program this May. To register, e-mail at info@rfp.ph.
