The Market Call | June 2015

 

Macroeconomy

 

While Q1 results had diminished optimism, we think it will likely be revised upward (5.6%) and maintain our full year projections since the country's economic fundamentals remain strong. Inflation is likely to ease further as food prices continue to fall or steady with the revival of supply chains, and as crude oil prices remain depressed due to oversupply from OPEC and North America. Exports are expected to start accelerating in H2 as the US growth story remains intact. OFW remittances should continue to pile in at 4-6% despite low oil prices that affect Middle East economies.

 

Fixed-Income Securities

 

As the US economy continues to improve, we may see a rise in benchmark US 10-Y T-bond yields in Q3 by 25-40 bps from end-May's 2.12%. We do not see this breach 2.8% by year-end. Despite the expected upward trend in long-term yields in the US, we see limited impact domestically as our econometric studies would show a transmission rate of only 25-35% to local yields. This upward pressure will be mitigated by the demand from the two large government-sponsored pension funds GSIS and SSS for long-dated bonds to match against future liabilities. Meanwhile, the forthcoming Debt Consolidation Program of the Bureau of the Treasury will sweep illiquid ISINs and boost the anemic trading volume in the GS market. With the resolution of the benchmark yield curve issue in the next two months, we see a rush of corporate issuances in H2, also to take advantage of still low interest rates.

 

Equities Market

 

The market turbulence, as experience in May, will likely become a regular occurrence in the interim or until we see investors' confidence improve. Upcoming Q2 2015 GDP and earnings data is paramount to investors on whether rich valuations can be sustained. Nevertheless, we are strategically constructive on PH equities amidst the volatile backdrop. Our year-end target is on the course to hit 8,000-8,300 as macro background remains sound. Our preferred sectors are modern retailing, power and oil refiners.

TMC06

 

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