Dear Colleagues, Partners and Clients:
We are pleased to release the August issue of The Market Call, as published by the FMIC & UA&P Capital Markets Research. This is a result of an in-depth analysis on the emerging and leading trends in the global and local markets that have shaped the direction of the Philippine capital markets in the last four weeks.
Here are the highlights of the August issue:
With Meralco electricity sales accelerating, infrastructure spending humming at a 35.9% growth pace, manufacturing output expanding strongly despite export weakness, and residential construction in full swing, we expect another above-target expansion of 7.5% or higher Gross Domestic Product (GDP) in Q2 of 2013. In view of the low exchange rate pass through (ERPT) to inflation and the likelihood of crude oil prices easing in Q4 as supplies both from OPEC and non-OPEC sources enter the market, and good harvests arising from relatively good weather, we think that inflation would stay at 2.8% in Q3 and move up only slightly in Q4.
§ Fixed-Income Securities
The outlook for the bond markets has brightened a bit since the Fed’s clarification of no immediate and definite timetable for QE tapering. SDA funds should continue to move back to the banking system, ensuring unabated liquidity in the financial system. This, together with below-target inflation rates, will have a downward pressure on yields, although the NG’s borrowing program augmented by its RTB issuance would partly offset the slide. We expect a rush of corporate issuances in H2 as firms take advantage of the present low interest rates and inaction of the Fed in Q3.
While the Philippine equity market will likely find support in the first half of August due to the acceleration of Q2 earnings releases, we implement a tactically cautious approach. First, we favor that Philippines equities remain vulnerable to fund flows movements and currency price actions. Second, we see that valuations are still demanding. Third, EMs are no longer the ‘popular’ market, U.S. and Japanese equities are the current favorites. Fourth, seasonality (August month) is in investors’ psyche. And lastly, event risks (i.e. Fed tapering off and MSCI rebalancing) will lead to an increase in volatility. We suggest lightening up of positions as Q2 earnings reports are released. Thereafter, increasing exposure on market weaknesses that result from the aforementioned risks would make sense.
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