While the National Government has not reported its cash operations in 2015, we think infrastructure spending had been quite robust given the gains in cement manufacturing in the first two months of 2015. Together with these, the recovery in Meralco electricity sales in March and continued low inflation, and a 16.5% increase in rice inventory over April 2014 should provide a good basis for GDP to rise between 6.5-7% in Q1 or just about at the same pace as in the previous quarter. With inflation still on a downtrend and money growth remaining soft, monetary policy will likely stay on hold for the rest of H1 2015.
Local 10-year T-bond yields will likely move slightly upward until June, with the entry of tax-exempt institutions (TEIs) in the secondary market. But inflation hitting below 2% in July should have a sobering effect on the markets as real yields get too inflated. Corporate issuances should regain momentum later in Q2, as firms try to catch the low end of a perceived rise in overall yields. But this won't necessarily translate into a more robust trading of corporate debt papers.
There could be further weakness in May due to seasonality and MSCI's semi-annual rebalancing. But we view any weakness to be a buying opportunity. Elevated valuations will be sticky and our year-end index call remains at 8,300-8,500, underpinned by stronger macro numbers for the Philippines this year. As a result, we see sustained interest from foreign funds. Our preferred sectors are modern retailing, gaming, power, and oil refiners – due to the rebound in oil prices.