Anchored in the strong domestic macroeconomic indicators, we maintain our positive prospect over GDP growth in Q4 which should hit our 6.5%-7% full year target. Inflation may pick-up pace in the first few months of 2018 amidst the tax reform, but should remain within the BSP target (albeit, at higher end). Global recovery, especially in the US, EU, and China, should provide a needed boost to exports, to fuel the economy’s second engine to drive 2018 GDP growth to 7-7.5%.
Fixed Income Market
As the US inflation figure still lags its target, financial markets anticipate three Fed rate hikes at most in 2018. The BSP is likely to respond with two rate hikes to limit inflationary expectations from exceeding its target as the Tax Reform for Acceleration and Inclusion's (TRAIN) higher indirect taxes come into effect. Thus, bond yields will likely have an upward bias in 2018.
The middle class will enjoy higher after-tax incomes due to the TRAIN which should result in higher consumption in 2018. This, together with the “golden age of infrastructure”, should boost earnings in 2018 by an estimated 10% to bring PSEi to 9,400.