Inflation, growth concerns seen to affect stocks

Local stocks are expected to give up some of their premium valuations as concerns over softer growth and higher inflation linger.

Financial markets were closed Thursday in celebration of the Philippine “Independence Day.”

In a research note titled “Sweet Spot No More” dated June 5, Bank of America Merrill Lynch through local brokerage partner Philippine Equity

Partners (PEP) said the period of strong growth without inflation was over.

“We expect that GDP (gross domestic product) growth will bottom out in the first half 2014 while inflation will peak during the same period. Until subsequent data points confirm this, however, the premium valuation enjoyed by the broad equity market may soften,” said the research authored by PEP’s Jojo Gonzales.

“Consumer stocks, in particular, whose revenue and margins tend to be more sensitive to inflation, may also stall until we see signs that inflation has indeed abated,” Gonzales said.

Meanwhile, Gonzales said the 4.5-percent inflation in May could already be the peak for 2014.

Philippine Equity Partners expect 2014 inflation to average at 4.1 percent.

On monetary implication, Gonzales said cost-push inflation, driven mainly by rice, would not be enough to sway monetary authorities into a policy rate hike.

“Nevertheless, the negative real rate situation, which has persisted since fourth quarter 2013, may ultimately warrant a policy rate hike—which we maintain may take the form of a 25-basis-point policy rate increase to 3.75 percent in third quarter 2014,” Gonzales said.

“If that is all the tightening seen in 2014, it should not be negative for growth and valuations,” he said. Doris C. Dumlao