The desired investment-led growth paradigm that now dominates the country’s development should continue at elevated levels, as large Public-Private Partnership (PPP) projects (considered as private construction) add to the growing roster of ongoing and upcoming infrastructure projects. Robust capital goods imports and the manufacturing sector output should add to domestic demand while exports should move into positive territory in H2. We expect the Monetary Board to lift policy rates by 50 bps to 4.5% this month as it seeks to cool inflationary expectations and exchange rate pressures.
The acceleration in inflation, especially due to food shortages, has eyes glued to the ability of the National Government to remove those shortages and reduce widened trade deficits which have pulled the peso down. The growing worries of contagion in emerging markets in terms of exchange rates and bond yields are a new source of push factor to domestic interest rates. Nonetheless, we think that bonds can become attractive again once the real 10-year yields reach 3% which can occur sometime before 2018 ends.
Inflation, which may have peaked in the third quarter, and BSP’s impending policy rate increases should provide market support for PSEi. However, this does not guarantee an upswing (as the local bourse seen to decline but not lower than 7,000), not until the market gets convinced that inflation has definitively started easing and external conditions improve (US stocks appearing overvalued, Fed rate hike in September seen to weigh down equities).