Strong peso, resilient equities market seen

Although Philippine financial markets are seen vulnerable to shifts in overseas investor sentiment, Bank of the Philippine Islands is projecting a “strong peso, resilient equities and a well-supported domestic bond market” on the back of sound economic fundamentals in the country.

It is still premature for the Philippines and other emerging markets in Asia to be hailed as “safe havens,” but they can already be considered “growth havens,” according to the August 16 research report of BPI’s financial markets group led by economist Emilio Neri Jr.

BPI sees the peso stabilizing at 42.20 to a dollar by the end of the year and further appreciating to 41.05 by the end of 2012.

On equities, BPI sees the main-share Philippine Stock Exchange index rising to 4,500 also by the end of this year, suggesting a 7-percent run-up from the end-2010 level. The PSEi, which is now in the third year of an upswing, closed at 4,305.56 last Friday.

On foreign exchange, BPI said the downgrading of the United States’ credit rating did not materially disrupt its projection of a stronger peso this year. It expects the US dollar to retain its reserve currency status and continue to be the standard measure of valuation for global trade and commodities.

“We see the degree of the peso’s appreciation as a function more of the US Fed’s (bias for monetary easing), positive domestic fundamentals and central bank actions,” the report noted.

The prospect of a sluggish growth in developed countries is also seen curbing demand for commodities, particularly fuel. This is expected to ease upward pressure on world consumer prices and temper headline inflation momentum later on.

BPI Research considers the timing of the release of the second quarter Philippine economic report on Wednesday (August 31) to be a “pivotal juncture” for potential investors looking for viable points to re-enter and reposition themselves in the domestic market.

“A weaker-than-forecast reading on August 31 could trigger a sell-off (or at least, a noticeable correction) that may be seen as a bargain-hunting opportunity, inasmuch as a disappointing performance should prompt the government for an appropriate response, presumably to refocus its efforts to sustaining domestic growth,” the report noted.

A subsequent improvement in the third quarter, for instance, will trigger a corresponding recovery in risk appetite, BPI said.

A benign inflation scenario is expected to give the Bangko Sentral ng Pilipinas room to shift its monetary policy strategy to a more “neutral” or even accommodative stance in the near- to medium-term. Such move, the research report said, could bring down local interest rates moving forward, providing fund managers who have long government securities positions potential windfall.

In the meantime, BPI said local equities would probably emulate their global counterparts in the near term, as their susceptibility to portfolio ebbs and flows would likely dictate their movements.

“However, we maintain our 4,500 year-end target level for the Philippine composite stock exchange index, the current correction is being seen as compulsory tough love following the rather meteoric rise in recent weeks.”