With global economy improving slightly to a 3.4% growth in 2017 from 3.1% expected for 2016 according to the International Monetary Fund's (IMF) projections as of October 2016, the external environment appears less daunting and encourages us to be more optimistic for 2017. Domestic demand may slow down only slightly in Q4 as investments continue its energetic run, while consumer spending should maintain its above-7% growth path considering that the employment situation has improved in Q3 while OFW remittances in both US$ and peso terms should provide robust purchasing power to households. Capital goods spending, as a result of the sustained gains in manufacturing output, shall continue to lead growth with an expansion of close to 15% in Q4. This virtuous cycle of manufacturing output gains leading to more employment and purchasing power and more capital goods imports to boost productive capacity. Inflation will remain at the lower end of BSP's target considering that there's little further upside to crude oil prices, while food prices stabilize as destructive typhoons and rains appear to wane. While NG will strive to ramp up spending in the last two months of the year, we think that the full year budget deficit will not exceed P300 B, or level off at 2% of GDP. The USD/PHP rate will remain under pressure as the U.S. economy's growth gains traction especially under an aggressively expansionary policy under President elect Donald Trump.
Fixed Income Market
Local bond yields should track more closely U.S. Treasury bond yields in Q1-2017. The latter, however, may remain elevated until the magnitude and timing of the fiscal stimulus under President-elect Donald Trump gets ironed out. Once the uncertainty clears, bond yields should trend lower as the U.S. bond markets may have priced in too much of the expected fiscal stimulus' impact on inflation. Another reason for local yields to trend downward after the above event would be the overshooting phenomenon typical in financial markets, apart from the usual liquidity infusions coming from the country's elevated savings rate and fast economic growth. As for ROPs, yields movements should remain more closely in tandem with U.S. Treasuries than peso denominated bond yields have been. A break from this pattern would occur once emerging market debt papers, in general, regain their attractiveness or the uncertainty pointed out above clears up.
Wait for the dust to settle, there are no shortage of risks that may dampen investors' sentiment. We acknowledge that PH economic fundamentals remain constructive in the next 12-months. However, this is clouded by government policy risks, both local and international. We do not see a re-rating in valuations in the interim, the market is on track to revert to the mean. We could decouple if earnings growth is robust and speedier relative to peers. On a positive note, the increasing volatility will create opportunities for investors. For now, we prefer to take a defensive stance and stick with counters with resilient and visible earnings profile. We would also be mindful and take advantage of mispriced stocks.