A coming surge in trading volumes
How CMEPA will affect Philippine equities. Estimated reading time: 12 minutes
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I’m excited about the new Capital Markets Efficiency Promotion Act (CMEPA), which just passed the Senate of the Philippines.
Once it’s been signed into law, it will lower stock transaction taxes from 0.6% to 0.1%. Dividend withholding taxes for foreigners will decrease from 25% to 10%.
I’m convinced the new law will be bullish for trading volumes and perhaps even the overall market. Let’s dig into it.
Table of contents:
1. Philippine equities
2. Trading volumes have been lagging
3. The CMEPA bill
4. A brighter future
5. The investable universe of stocks
6. Conclusion
1. Philippine equities
Philippine equities have been left for dead.
The index has gone nowhere for a decade and is now touching the lows last seen during the COVID-19 pandemic:
It’s fair to say that sentiment is at rock-bottom levels.
The biggest issue for the market has been the high interest rate environment. After the US Federal Reserve started increasing interest rates in 2022, the Bangko Sentral ng Pilipinas quickly followed suit, raising the target reverse purchase rate (RRP) from 2% to over 6% in less than a year:
Interest rates have remained stubbornly high despite subdued inflation pressures. The inflation rate remains well within the targeted 2-4% range:
The Bangko Sentral seems to be worried about the exchange rate and takes it into account when setting monetary policy. That’s why the response to the lower inflation prints has been slow.
However, I’m positive. The macroeconomic outlook seems decent to me. While the Philippines has a twin deficit, it partly reflects longer-term investments in infrastructure rather than portfolio flows. And external debt levels remain modest.
Two of the key drivers of the Philippine economy — cash remittances from Overseas Filipino Workers and business process outsourcing continue to tick along nicely. While it’s possible that call centers will be disrupted by generative AI tools, we’re not seeing that in the numbers yet:
Real GDP growth for the Philippines continues to be relatively healthy. The 4Q2024 print was 5.2% year-on-year. And the population growth remains high at 1.5% per year, which should be positive longer-term for banks and consumer names.
Despite the strength of the Philippine economy, stock prices have fallen to record lows. The P/B for MSCI Philippines is now touching its COVID-19 lows of March 2020 at just 1.1x:
This is a surprising development, given how strong the return on equity has been for the market. In my view, the Philippines ranks as one of the cheaper markets in Asia, neck and neck with Indonesia:
Some investors have been worried about President Ferdinand Marcos Jr (“Bongbong Marcos”). He’s the son of former dictator Ferdinand Marcos who ruled the Philippines with an iron fist for over two decades.
But Ferdinand Marcos Jr has been more business-friendly than most had feared. He’s introduced a new public-private partnership law to improve the nation’s infrastructure. 185 flagship projects worth US$160 billion have been announced. A new law now allows for full foreign ownership of telecom companies, railways and airlines. He’s pushed for the digitalization of government processes. And business confidence has improved.
His public approval ratings have gone down, however. He’s in an outright war with the Duterte family, having ousted Sara Duterte as Vice President and more recently received death threats from her. Rodrigo Duterte and his two sons, Paolo and Sebastian, are going to run for the Senate in the legislative elections in May 2025. So, the Duterte family is not out of the picture yet.
Concerns about corruption also remain. Marcos has injected capital into the Philippine Veterans Bank, presumably used to acquire assets on behalf of his family. His cousin set up a company called RYM Business Management taking stakes in important companies, including ABS-CBN.
But at the end of the day, Marcos is business-friendly and not a socialist. He’s also pushed the Philippines closer to the United States geopolitically, which means military support and low risk of capital controls.
At this point, all we need is a lower interest rate environment, which should push investors away from fixed-income instruments and back into the stock market.
2. Trading volumes have been lagging
Trading volumes in the Philippines have declined in the past decade as attention has turned away from Southeast Asia towards US tech stocks and other regions:
But the Philippines is also lagging behind other ASEAN countries, too. Its stock market turnover — as measured by annualized trading volumes divided by the market cap — is only 11% compared to 29% in Malaysia and a whopping 79% in Thailand (2022 numbers):
Will the gap ever close? I think it’s possible. Thailand has a stock transaction tax rate of 0.11%, Vietnam 0.1%, India 0.125% and Malaysia zero. So CMEPA will level the playing field in terms of transaction taxes.
The number of listed companies in the Philippines is tiny compared to other countries in the region: only 283 companies compared to almost a thousand in each of Malaysia and Indonesia.
When you take the relatively large population of 117 million into account, the disparity becomes even greater: just 2.4 companies listed per million population compared to 29.0 in Malaysia.
A higher number of listed companies would also improve overall trading volumes. So, the potential is there. It’s just a question of whether the regulatory climate can improve.
3. The CMEPA bill

This broad macro picture sets up the scene of what’s going to happen once the Capital Markets Efficiency Promotion Act (CMEPA) is signed into law. The first bill was approved by the House of Representatives in March 2024, and a related bill was by the Senate last week.
The purpose of CMEPA is to align the tax climate with that of other ASEAN countries, such as Malaysia, and help attract foreign capital.
CMEPA will lower stock transaction taxes from 0.6% to 0.1%. If you buy and then sell shares listed on the Philippine Stock Exchange round-trip, the total tax incurred will drop from (0.6% + 0.6% =) 1.2% to (0.1% + 0.1%=) 0.2%. This implies a massive drop in transaction costs, leading to higher trading volumes.
The new law will also lower withholding taxes for non-resident individuals from 25% to 10%. Lower withholding taxes will help attract foreign investors to the Philippines, especially those seeking high dividend-yield stocks.
Finally, CMEPA includes financial instruments other than stocks, such as ETFs, depositary receipts and derivatives, as part of its framework. This means ETFs will be subject to tax treatments similar to mutual funds. It reduces uncertainty that may have stopped financial innovation from taking place.
4. A brighter future
I think it’s logical to assume that trading volumes are likely to go up now that round-trip transaction costs fall by a whopping one percentage point. But let’s look at a few historical precedents.
In the United Kingdom, from 1974 to 1984, the government charged a 2% stamp duty on the change of ownership of any security. It did not apply to foreigners, and no stamp duty would be imposed if the stock continued to trade under the same broker’s name. According to research, this stamp duty reduced trading volumes by as much as 50% from 1974 onwards.
Under Margaret Thatcher, the government reduced the stamp duty from 2.0% to 0.5% in 1984-86 as part of the financial deregulation package that became known as the “Big Bang” reforms. However, these reforms also included lower minimum commissions. What was the result? According to an article from Goldman Sachs:
“The volume of shares traded on the Exchange and its market capitalization increased, reinforcing London’s leadership in interbank lending, bond, commodities, and currency markets, and facilitating 24-hour trading across the world.”
According to another BBC article, the Big Bang reforms caused trading volumes to rise from US$4.5 billion to US$7.4 billion in the week following the reform in 1986 — an increase of +64%. However, I haven’t been able to confirm whether these high trading volumes persisted beyond that initial week.
A better precedent might be Sweden, which introduced a stock transaction tax of 0.5% in 1984. This tax was soon doubled to 1.0% of any transaction. The consequence was that 30% of equity trading moved offshore, mostly to London. Meanwhile, domestic investors reduced their trading activity. Liquidity dried up for small- and medium-sized companies.
After the stock transaction tax was removed in 1991, trading volumes went up exponentially by a factor of four in the following three years, as you can see from the following chart:

Another example is Australia in 2001. At that time, it removed the 0.3% stamp duties that had previously been imposed on share transfers. Following the removal of this stamp duty, Australia’s turnover velocity rose from 60% to 90% in the following five years, as you can see from the blue line in the following chart:
Out of these three examples, I believe that Sweden in 1986 is the best precedent for the Philippines today, given the nature of the tax and the almost complete removal of it.
In the case of the Philippines, how much will trading volumes increase? I bet we’ll end up with at least a 50% increase in the next few years. I’m also convinced that we’ll see a higher number of IPOs in the future, as the dreaded IPO tax was also removed just a few years ago. The future looks bright.
5. The investable universe of stocks
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