We maintain our view that GDP expansion in Q3 will exceed the 6% mark recorded in Q2 amidst exceptional strength of private and public investment spending, coupled with modestly rebounding exports. We think that BSP would raise policy rates by a maximum of 25 bps before the end of 2018, despite falling rice, food and oil prices, since bus and jeepney fares are supposed to rise by November.
The September super-typhoon proved more disastrous than expected and boosted inflation and bond yields. And while US Treasuries have risen and will still move up with the likely fourth Fed rate hike in December, domestic inflation remained as the main concern not only of consumers but also of financial markets. Local bond investors have largely priced-in future rate hikes, and so the key factors on future bond yields would be inflation and market liquidity. With rice prices actually falling by early October and crude oil prices receding from last month’s peak, we think inflation would have peaked in September. However, entry into the market should be disciplined and only when elevated real yields exceed historical averages.
With volume being way below average in the first week of October, we cannot say that PSEi has unequivocally entered the bear market. A slowdown in inflation, which is seen to have peaked in September, and an unusually strong Q3 earnings, which remain a question mark (given rising interest rates and peaking inflation in Q3), should allow investors to confidently return to the market in the months ahead.
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