With BSP’s Consumer Confidence index still in positive territory and better global economic outlook, the Philippine economy is on track along a 7% GDP growth path. The agricultural sector should rebound starting Q1-2017 and post modest growth for the year. Investment spending will continue to drive the economic expansion as capital goods are expected to register double-digit gains for most of 2017. Manufacturing sector, which together with another banner year for Constructions industry, should propel industrial output to a pace of 8% or better. We expect headline inflation to hit 3% and hover around it in H1 as crude oil prices have stabilized at current levels while food supply should improve with better agricultural performance and early rice imports. The outlook for H2 may be less sanguine if the proposed excise taxes on petroleum products become effective then. Given the solid gains of the US economy and slight improvement in the Eurozone, we expect exports growth to become positive, albeit at a low single-digit pace in H1. Despite a slight improvement in the external sector, we foresee continued depreciation pressure on the US/PHP rate in Q1 but at a milder pace than in H2-2016.
Fixed Income Market
Both foreign and local uncertainties beset the domestic bond markets. In the US, analysts and firms are awaiting more details from President Trump’s budget, while in the Philippines, the specter of higher inflation looms in the horizon with the expected increase in petroleum product taxes designed to offset tax cuts that should benefit the middle class. With inflation hovering 3% for the rest of H1, external factors and investor sentiment should drive the bond market. With liquidity still abounding despite increased government borrowing, its negative effect on yields should offset much of the premium from the above uncertainties and moderately higher inflation rates. ROPs regain their relative attractiveness in light of peso weakness and good coupon rates which tend to lessen duration effects.
Economic fundamentals remain intact, driven by domestic demand and boosted by infrastructure spending. These, however, have already been priced in by investors. We do not expect price-to-earnings (P/E) ratio to expand given global and local policy uncertainties, our expectation of higher interest rates, and the Philippine market already late in the equities cycle. Returns will likely come from a combination of selectivity and active/nimble management. We like the following: banking stocks given the ample room for interest margin expansion and loan growth, infrastructure due to doubling in NG infrastructure budget to P860.7 B in 2017 and consumer staples as these benefit first from an increase in disposable income and tend to show visible earnings prospects.