What experts expect for 2019
What do analysts and economists think about the economy, interest rates and the peso? Are their views the same? How should we rebalance our investments considering their analysis? Last week, I had the privilege of listening to the views of and exchanging ideas with respected economists and equities strategists from different fund houses and banks in the country.
There were topics where we shared the same views. For example, almost everyone I spoke to was bullish about the Philippine economy, with GDP projected to grow by 6.4 percent to 6.9 percent this year. One of them agreed the delay in the passage of the 2019 budget and the election ban would hurt economic growth, but he remained confident the country would still grow above 6 percent given the favorable impact of lower inflation and lower unemployment on consumer spending.
Although there was a lone bear who forecasted GDP growth to drop below 6 percent this year, he admitted he did not have a strong conviction on his call because it was based on the assumption of his bank’s regional economist who expected the BSP to continue raising interest rates this year on concerns the Philippine economy was overheating.
Everyone also shared the view that the peso might depreciate to about 54:$1.00 in 2019. This is based on expectation the Philippines would continue to suffer from a current account deficit as the government continues to import capital goods due to its aggressive infrastructure spending.
The topic of interest rates was more contentious. Although everyone agreed there would be no rate cuts by the BSP this year, even with the lower inflation, the range of expectations for the domestic 10-year bond rate was very wide, with some expecting it to drop to below 6 percent from 6.5 percent currently while others expect it to rise again later this year.
Those who expected rates to drop highlighted lower inflation and potential bank reserve requirement cuts by the BSP this year. The economist who had the lowest interest rate forecast also highlighted his nonconsensus view that the US economy would go into a mild recession this year and because of this, there would just be one US Fed rate hike early this year, but this would be followed by a rate cut in the second half. He also mentioned the possibility that the BSP would cut reserve requirements by more than 200 basis points this year which was what most economists expected.
Those who expected rates to stay flat or higher highlighted the country’s strong economic growth, the government’s large borrowing requirement and banks’ elevated loans to deposit ratio. In fact, as mentioned earlier, the most bearish analyst said he expected a rate hike by the BSP given their bank’s view that the economy was overheating.
The discussion on the direction of the stock market and which sectors would outperform was the most contentious. The most bullish analyst I spoke to had an above consensus target for the PSEi of 8,900 which was supported by a projected 13-percent earnings growth of index stocks.
Another analyst I spoke to said he was positive on the stock market because of the country’s strong economic growth which should translate to strong earnings growth. However, he did not expect stocks to trade at elevated P/E multiples like before because he expected a permanently higher interest rates.
The most bearish analyst stressed that although earnings growth was expected to be strong in peso terms this year, growth would be much lower in dollar terms due to the depreciation of the peso. And since he is expecting interest rates to be higher, stocks should trade at lower P/E multiples relative to their historical averages.
Notwithstanding his bearish view though, he said the ongoing shift in fund flows from developed markets to emerging markets and the fact that both foreign and local investors were light in the Philippines could continue to drive the Philippine market higher this year.
As for the best sectors to invest in, everyone agreed the consumer sector would do well. The views on the banking and property sectors were mixed.
Those who had a positive view on banking highlighted higher trading gains and margins. However, those who had a negative view highlighted rising deposit rates or funding costs and the possibility of higher defaults given the higher borrowing rates.
Those who had a positive view on the property sector highlighted companies’ strong take-up sales, massive unbooked revenues and strong rental markets supported by demand from various groups. Those who were less positive highlighted the negative impact of higher rates on amortization which made purchases less affordable going forward.
Only time will tell where the peso, interest rates and stock market will go in 2019. Continuously monitoring economic developments locally and globally would give us some clues though on which scenarios will most likely unfold. Are there signs that the US economy is performing worse than expected, prompting the US Fed to stop raising rates sooner than expected? Are there signs domestic inflation is once again going up, necessitating the BSP to become more hawkish? Or are there indications the BSP is becoming more concerned about banks’ tight liquidity, necessitating a more aggressive reduction in reserve requirements?
Given the consensus view that the peso will weaken, it might be wise to buy dollar requirements early while the peso is strong as this might not be sustainable.
As far as the stock market is concerned, I’m sticking to my view for 2019 that the PSEi would go up due to strong earnings growth. The stock market should also continue to benefit from the ongoing fund flow out of developed markets to emerging markets. However, I’m sticking to my 2019 target of 8,600, at least in the short term, given my expectation that interest rates would stay elevated and that GDP growth would not reach the government’s target of 7-8 percent.
I am also maintaining my positive view on the banking sector because I don’t expect defaults to go up substantially even with higher rates as economic growth remains strong. Likewise, I’m maintaining my neutral view on the property sector. Although I know that property companies have a lot of unbooked sales, I am worried higher rates will lead to weaker take-up sales in the future, hurting sentiment for property companies that are more dependent on sales.
