Foreign direct investments (FDI) into the country streaked to a record-high of $8.7-B YTD in November even as domestic investors and government infrastructure spending drove Gross Domestic Product (GDP) to a 6.7% full-year growth in 2017. These translated into a 16.1% surge in capital goods imports in November. As added booster, exports posted slightly positive gains, while Overseas Filipino Workers’ (OFW) remittances continued to expand. The fly-in-the-ointment came from the sharp rise in inflation to 4% in January from 3.3% in December, mostly attributable to higher food and crude oil prices, as well anticipated increases in fuel taxes and some other indirect taxes. While trading volumes and auctions gained in the GS bond market, yields headed north as US Treasuries showed the way. The stock market racked up 6 new records in January but consolidation appeared underway as the market looked overbought, while the US stock market’s plunge into early February pulled the local course in the same direction.
We believe the PH is geared towards a faster expansion and 2018 onwards with robust domestic demand as the main driver. The external environment, especially with the recovery in US, EU, Japan, and China, should further boost the country’s export and fuel economic expansion. Moreover, we think that inflation will accelerate in H1 but will start to decelerate thereafter as food and crude oil prices normalize. Finally, the peso will again be generally under pressure in 2018 as PH trade deficits bloat with elevated investment spending and renewed strength of the US economy at the back of the massive Trump tax cuts.
The recent climb of 10-year US bond yields may persist should the Trump tax cuts and the government spending on infrastructure and defense contribute to a significant budget deficit. On the other hand, local inflation is projected to outpace the 2-4% BSP inflation target in 2018, thus, demand for local bonds will likely taper off for the first half of the year with the nominal 10-year PH bond yield not likely to exceed 6.5%.
PSEi’s ongoing decline possibly leading investors to sustain the trend and the low spread between earnings yield (E/P) and 10-year T-bond rates suggest a deep consolidation period soon. Investors must try to avoid getting whipsawed due to recent developments.