The Market Call | February 2015




We expect a continuation of the Q4 surge into 2015, starting from the very first quarter of the year. Continuing decline in rice prices and crude oil prices breaching $50/barrel should put further downward pressure on inflation. We expect average H1 inflation to average 2.4% and only slightly higher in H2. With inflation slipping and US Treasury bonds also southward bound, we see strong downward pressure on interest rate, which should spur stronger consumer and investment spending. Together with weak money growth, all these factors would provide more than sufficient reasons for the BSP to hold off further monetary tightening. Exports may slow down a little in Q1 as consumer confidence in the US has been very volatile despite significant improvements in job creation. However, we expect an acceleration thereafter as the recovery gains further traction and Eurozone and Japan QE impact spreads throughout the world.


Fixed-Income Securities


With domestic inflation on the downtrend and crude oil prices holding up at low levels, these provide additional bullets for investors to seek local Treasury bonds. However, as the local market may have "overshot" the expected bottom, there may be little further downward bias left. From the external side, US Treasuries should continue to attract foreign investors as a "safe haven" given the robust recovery of the US economy, and the deflation-threatened Eurozone and Japan areas. This should therefore provide little, if at all, upward pressure on US rates for most of Q1.


Equities Market


Our PSEi end-2015 target is 8,300-8,500. We see potential hiccups that may arise from Morgan Stanley Capital International (MSCI) quarterly rebalancing in February, but should the results be unfavorable, we see it as buying opportunity. Key indicators to watch for are the Philippine exchange rate as it is historically negatively correlated with the performance of PSEi and MSCI. We reiterate our preference towards retailers and power generation sector. We still like gaming for its growth potential but negative news flow from Macau may lead to prolonged underperformance of the industry.



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