Bonds will likely outperform equities in the Philippines this year, as interest rates continue to decline given an improved inflation outlook and the central bank’s monetary easing, economists said.

In a capital market and macroeconomic outlook briefing jointly held by First Metro Investment Corp. and the University of Asia and the Pacific (UA&P), economists said the equities market was expected to be generally weak but would offer good values to investors wishing to buy at the bottom.

Foreign exchange markets were seen remaining volatile, which might lead to the depreciation of the peso to 48-54 against the US dollar. But this depreciation will help the domestic economy by boosting the local currency equivalent of overseas Filipino remittances, UA&P economist Victor Abola said.

He said the domestic economy could grow by 4.1 percent, at the high end of the forecasts made by multilateral institutions, thus sustaining the growth trend seen over a 10-year period.

“Growth will come from construction, government spending, public spending on infrastructure and private spending such as construction of housing units worth P3 million and below. There also will be positive growth in business process outsourcing and food and beverage [manufacture],” Abola said.

Given the global easing of monetary policy, he said, the central bank would likely slash its key interest rates by one-half to one percentage point.

“So that’s very good for the bond market. The bond market will be quite promising,” Abola said.

“By and large we are seeing fixed income market to be a very good market in the light of a low interest rate environment and ample liquidity,” First Metro executive vice president Roberto Juanchito Dispo added.

Dispo said bond spreads would likely compress by 100 to 150 basis points this year as the central bank eases monetary policy further.

Falling yields results in higher bond prices, leading to higher returns or capital gains for fixed-income investors.

Aside from cutting its key interest rates, Dispo said the central bank would likely calibrate its high-yield Special Deposit Accounts to free up more liquidity to the system.

While banks will likely face tough pressure on earnings this year, Dispo said, they will post positive mark-to-market gains on fixed-income investments when interest rates fall.

Given the decline in global oil prices, First Metro expects inflation to fall to as low as 2.0-3.0 percent year-on-year as early as this first half of the year, which would result in lower interest rates, with 10-year money projected at 4.5 percent this year. With editing by INQUIRER.net