After hitting a high of 8,077.51 on May 3, the Philippine Stock Exchange index (PSEi) fell by a total of 4.2 percent the past week to close at 7,742.20 last Friday. Foreign investors also turned into net sellers after consistently buying Philippine stocks during the first four months of the year.
The sell-off was caused by numerous factors, starting with the escalating trade tensions between the US and China. Early last week, President Trump threatened to increase tariffs on $200 billion worth of Chinese goods from 10 percent to 25 percent. China responded by saying it would take necessary countermeasures.
Also last week, several listed companies, such as Concepcion Industrial (CIC), Robinsons Retail (RRHI), DNL (DNL), Metro Retail (MRSGI) and Security Bank (SECB), disclosed weaker than expected first quarter earnings results.
Finally, on Thursday, the government announced a disappointing first quarter economic growth of 5.6 percent, down from 6.3 percent during the previous quarter and 6.5 percent during the same period last year.
Despite these, we don’t think it is necessary to turn bearish on the Philippine economy or the stock market.
Although the never-ending trade woes of the US and China will lead to weaker global trade, the impact on the Philippine economy should be minimal. Compared to other Asian countries, export account for a relatively smaller share of the Philippine economy. Moreover, foreign direct investments into Asean countries is expected to pick up as companies divest out of China to manage risks.
Although the Philippines’ first quarter gross domestic product (GDP) growth was disappointing, it was not surprising given the delayed passage of the government’s budget and the higher interest rate environment. Based on the first quarter GDP numbers, growth decelerated as the increase in government spending, capital formation and exports slowed down.
However, GDP growth outlook for the second half of the year is expected to improve. Last April, the government finally passed the 2019 budget, paving the way for government spending to rebound.
Inflation is also slowing after hitting a peak of 6.7 percent in October. On Tuesday, the government announced inflation fell for the sixth month in a row to 3 percent in April, bringing the rate for the first four months of the year to 3.6 percent—well within the Bangko Sentral ng Pilipinas’ long term target of 2 to 4 percent.
Lower inflation is good for consumer spending as it boosts consumer confidence. Lower inflation also increases the likelihood that interest rates will go down, encouraging higher spending on capital formation.
Last Thursday, the BSP already cut benchmark rates by 25 basis points. Because of falling inflation, the BSP is also expected to cut banks’ reserve requirement ratio soon, freeing up liquidity and allowing the inverted yield curve to normalize.
The Philippines’ improving economic outlook and lower interest rates should be good for corporate earnings going forward, which is why we should not be too fixated with companies’ disappointing earnings.
Admittedly, the Philippine stock market could remain weak in the short term. However, lower rates coupled with the country’s improving economic outlook mean better days ahead.
Therefore, forward looking investors should stay vigilant and take advantage, assuming prices of Philippine stocks continue to go down in the short term because of the weakness in global markets.