We think that PH economy is off to a good start in Q4, with NG infrastructure spending in October expanding by 17.8% year-on-year (y-o-y) and positive exports performance, and following GDP acceleration in Q3 to 6.9%. We believe that our 6.5%-7% FY 2017 target will easily be hit. Exports should rise at a faster rate in Q4 as the synchronized upswing in the global economy makes its impact. Inflation should remain at 3.3% in December, but we do expect a sharp jump in January with the Congressional approval of higher fuel taxes, sin taxes (alcohol, beer, and cigarettes), a new tax on sugar-based beverages, a slew of other taxes, and less exemptions for VAT.
Fixed Income Market
Long-term T-bond yields have climbed by 37 bps since end-September and may head towards overshooting. We do not expect much positive impact of local inflation easing in November and December since investors may wait for the actual jump in inflation due to higher taxes on fuel and other products, and new taxes that will take effect in 2018 following the approval of the administration’s tax reform bill. Bonds investors will have to wait for better times (e.g., overshooting) or turn to bonds (Hold-To-Maturity) as a buffer for diversified portfolios.
The recent steep rise in share prices will likely invite profit-taking and consolidation to end the year. This is much-needed to bring back share prices back closer to more fundamental valuations. Investors may return early in Q1-2018, but the timing of this homecoming would depend on the positive resolution of uncertainties, both abroad (e.g., Trump’s tax reform, Middle East and North Korean tensions) and at home (actual inflationary impact of new/higher taxes) and the final outcome of the effort to remove the country’s Supreme Court Chief Justice from office (via impeachment).