Keeping an eye on oil; RTBs for your medium-term needs
The stock market has been very volatile lately. One of the major risk factors that I think equity investors should pay close attention to is the price of oil as it has a major impact on the stock market.
As of this writing, the price of Dubai crude oil is $74.79 per barrel, up 51.2 percent from the same period last year and 21.5 percent for the year-to-date period.
The price of oil is up significantly due to several reasons, including: the ongoing global economic recovery that is boosting demand for oil; the decision of OPEC and Russia to cut oil production by 1.8 million barrels per day beginning 2017; the decision of President Trump to pull out of the Iran nuclear deal, which could potentially result to a cut in Iran’s oil production of 1 million barrels per day; and instability and dwindling oil production in Venezuela.
In one of my previous columns, I already mentioned how the significant increase in oil prices will cause inflation to stay up this year, preventing the market from recovering rapidly as consumers spend less and corporate profits suffer from higher costs. The Bangko Sentral ng Pilipinas (BSP) already warned that inflation could increase further to 4.6-5.4 percent in May from 4.5% in April due to rising oil prices, among others. Labor groups are also becoming more vocal in pushing for minimum wage increases while public transportation groups are clamoring for fare hikes, both of which are inflationary.
Another negative repercussion of rising oil prices is the possible suspension of the scheduled increase in excise taxes on fuel in 2019 and 2020. Recall that under the tax reform law, the increase in excise taxes will be suspended if the average Dubai crude oil price based on Mean of Platts Singapore for three months prior to January 2019 and January 2020 exceeds $80 per barrel.
The suspension of the scheduled increase in excise taxes on fuel is not good as it will reduce the potential revenues of the government which in turn will lead to less spending on infrastructure. This will also result in slower economic growth and give foreign investors, which have already been consistent net sellers in the Philippine stock market during the past few months, another reason to stay away.
One of the key events to watch out for is the scheduled meeting of OPEC oil producers and Russia in Vienna on June 22. A few weeks ago, Saudi Arabia’s Energy Minister Khalid al-Falih said that he was in discussions with Russia and other OPEC nations to increase oil production to ease global supply concerns. Hopefully, they agree to increase production, allowing oil prices to stabilize. After all, high oil price will not only hurt global economic growth but also strengthen shale oil producers in the United States, causing more problems for OPEC and Russia in the longer term.
If you currently have some extra cash that you plan to invest for your medium-term needs, I strongly encourage you to invest in retail treasury bonds (RTBs).
Just recently, the Bureau of the Treasury announced that it raised P66 billion from the sale of three-year RTBs with a yield of 4.875 percent.
The yield on the latest RTBs is very attractive since it is higher than those of the RTBs issued last year. Recall that in April 2017, the government issued an RTB maturing in three years with a yield of 4.25 percent. In December, it issued an RTB with a longer maturity of five years, but with a yield of only 4.625 percent.
Another reason why RTBs are attractive: Unlike most high yielding bank deposit products which are available only to investors with millions, retail investors can avail of the RTBs for as little as P5,000.
If you are interested to invest in these RTBs, you should go to your bank right away since the public offer period ends on June 8, Friday. The deadline may even be cut short assuming that the offer size of P66 billion is already fully subscribed.
