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What is a bubble? Was the recent run of the Philippine Stock Market a bubble?  Did this bubble just burst? In "10 Market Bubbles That Could Soon Burst", author Charles Wallace listed Emerging Market Stocks as one of those 10 market bubbles that could soon burst.  Although the Philippine Stock Market wasn't specifically mentioned, it definitely is part of this group being the top performer in Asia just a couple of weeks back.  With the recent decline of the PSEi for the past 6 days, can we conclude that indeed we were in a bubble and that the bubble has just bursted?

Investopedia.com defines a speculative bubble (some may refer to it as a market bubble, economic bubble, price bubble, etc.) as "a spike in asset values within a particular industry, commodity, or asset class."  It went on to say that the driving forces usually involve fundamental and psychological forces.  It stated that "in the beginning, attractive fundamentals may drive prices higher, but over time behavioral finance theories suggest that people invest so as to not "miss the boat" on high returns gained by others.  When the artificially high prices inevitably fall, most short-term investors are shaken out of the market after which the market can return to being driven by fundamental metrics."

Just basing it on this definition, then I would say that indeed the Philippine Stock Market was in some sort of a  market bubble.  With analysts coming out with forecasts predicting the market to produce hefty returns for the next year, some even arguing that it would last for the next 3 to 5 years, investors rushed to get in the market so as not to be left behind.  This caused the market to appreciate in value in a very short time, forming a bubble of some sort.  (Believe it or not, ALFM Growth Fund is already oversubscribed.  They would have to wait for SEC approval to be able to add shares before they can accommodate new investors.)

However,  I would have to say that the current market is backed by very strong fundamentals.  Just this week alone we've had around 10 companies reporting double-digit returns.  Some even reporting net incomes more than double that of the previous year.  In this regard, I'd like to think that it was just a small bubble worth at least a week or 2 of decline.  In effect, a healthy correction that was very much needed by the market.  And as the last sentence in that definition indicates, the Philippine stock market will soon be ready to be driven by fundamental metrics again.

As to whether the Philippine market and other emerging market stocks would definitely turn into a bubble, i guess only time will tell.

Along with emerging market stocks, Charles Wallace also included the following in his list: Gold, Real Estate in China, Alternative Energy, Commodities, Apple (No, not the fruit but the company that makes iPhones and iPods), Social Networking,  Small-Tech Companies, the U.S. Dollar, and the US Government Debt.  If you have the time, read the article.  It's very interesting.

Keep on attracting money, Money Magnets!  Let's achieve our GOALS in life together! (^o^)/

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