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Macroeconomy

The PH economy has returned to the fast lane with the 6.2% GDP growth in Q3, and we expect this to accelerate to 6.5% and above by Q4, as consumer, government and investment spending get into higher gear moving forward. Low inflation, huge job gains, and low interest rates will drive more robust consumer spending, while National Government (NG) continues to ramp up infrastructure spending, and private sector propels PPP and capital goods investments. The exchange rate shall see renewed pressure as the Build, Build, Build gains expand trade deficits again.

Fixed-Income Market

We see a slight downward bias in local bond yields, especially for short-dated GS. The latest 100 bps reduction in RRR, inflation averaging 1.5% in Q4, and low to negative interest rates in Japan and three EU major economies, provide the impetus for this. Although we do not see recession in the US in 2020, its mild slowdown will create downside for short-term yields in US and would discourage domestic bonds investors from asking higher yields for peso-denominated GS.

Equities Market

While the earnings outlook for Q4 may not be as remarkable as the Q3 reports given that bank earnings are unlikely to repeat in Q4 amidst fairly flat long-term bond yields, we still remain optimistic both for the rest of the year and 2020. To be sure, the MSCI rebalancing in November would have its negative impact, but this would provide entry opportunity for investors. Good earnings plus other positive factors—RRR cuts not yet fully felt, GDP back to above-6% growth– and our view that GDP would expand even faster in Q4 and that NG and infrastructure spending would accelerate further in Q4 and in 2020 boosts the case for PSEi setting a new high in 2020, while still allowing a possible year end close at around 8,400.

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