Despite a high base in Q1-2016, we think GDP growth in Q1-2017 will exceed 6.5% as all indicators, except faster inflation, signal sturdy output expansion in the current quarter. With particularly robust manufacturing output gains in the last two months of 2016, capital goods imports should continue to post above-20% gain in Q1-2017. With bloated domestic demand and exports gaining ground, Q1 performance should again signal much vigor in the economy. While inflation breached 3% in February, we think it should stabilize just above it, as crude oil prices have shown limited upside, and food price inflation can slow down with the inflow of more rice imports. The exchange rate should remain above P50/$ for the rest of H1-2017. The U.S. economy and dollar’s bulging muscle shall continue to provide pressure on the peso.
Fixed Income Market
Local bond yields have followed the U.S. Treasuries’ upward swing. Since much of the Fed rate hike has been priced in to the long-dated GS, the bigger moves may continue to focus on the belly. Despite the outflow of foreign investors from the local stock market, the financial system appears still awash with excess funds, which put a ceiling to the rise in yields. We expect continuing volatility in both the U.S. and local bond markets. The pipeline for corporate issuances should unclog in Q2 with the expected approvals and issuances spiking, as corporate treasurers try to catch acceptable interest rates before yields rise further for the rest of the year. ROPs may become even more attractive when the peso depreciation temporarily abates, as better yields and exchange rate gains could offer a buffer.
We do not see positive catalysts for local equities in the next two months. If at all, the headwinds appear daunting. These include: (1) the strengthening of U.S. economy and dollar and its negative effect on the peso; and (2) the economic fundamentals on the external side show some cracks as the current account looks headed towards a deficit as a result of years of an overvalued currency. The investing strategy remains the same: patience and search for value stocks (consumer, banking and energy sectors) and entry on market downturns.