No catalyst to go up
During COL Financial’s midyear market briefing, we said that the Philippine market has what it takes to outperform the US market. Unfortunately, all the risks to our bullish view materialized the past month.
The recession of the US economy continues to face delays. In fact, gross domestic product (GDP) growth in the second quarter reached 2.4 percent, outperforming the consensus forecast of 2 percent.
Because of this, US bond yields increased across the board as strong economic growth numbers raised the likelihood the Fed would stay hawkish and either raise rates or keep them elevated. Note that yields on the 10-year and the 30-year bonds reached 15-year highs the past few weeks, exceeding their peak levels in 2022. Rising rates also make stocks less attractive as bonds now provide investors with competitive returns.
Rising yields are also supporting the dollar. Since the middle of July, the dollar has appreciated by around 4 percent against a basket of currencies. This was also responsible for the recent weakness of the peso. The depreciation of the peso is not good for Philippine stocks as it discourages foreign fund managers from returning to the country.
While economic growth in the US surprised in a positive way, ours surprised in a negative way. The Philippine economy in the second quarter grew by only 4.3 percent, below expectations of 6 percent. Moreover, GDP contracted by 0.9 percent quarter-on-quarter, showing significant weakness.
GDP growth disappointed as high inflation and interest rates hurt consumer spending and capital formation, while government spending fell by 7.1 percent.
The first-half earnings growth of locally listed companies also showed signs of slowing down, with median earnings growth reaching only 8.8 percent versus 28.2 percent in the first quarter. Moreover, fewer companies outperformed estimates at 35.2 percent versus 44.4 percent during the first quarter.
Oil and rice prices are also on the rise. Since the middle of July, the price of oil has increased by 6.2 percent while the average price of rice jumped by 20 percent. These could fuel inflation in the second half of the year.
Despite signs that Philippine economic growth is slowing down, the threat of elevated Fed rates, the weakness of the peso and the risk of higher inflation caused by rising oil and rice prices will make it difficult for the Bangko Sentral ng Pilipinas to cut domestic rates. Because of this, high interest rates will continue to be a drag on economic growth, which is bad news for corporate earnings.
Finally, the poor economic performance of China is likewise a threat to the local stock market.
Despite the reopening of its economy, China grew just 6.3 percent in the second quarter, missing forecasts of 7.3 percent. Retail sales were also weak, increasing by just 3.1 percent in June after rising by 12.7 percent the previous month. Meanwhile, private fixed-asset investment shrank 0.2 percent in the first six months, suggesting poor business confidence.
Although China’s central bank is cutting rates to encourage more economic activity, economists don’t think it is enough to boost economic growth. Poor sentiment for China could hurt sentiment for all emerging markets in Asia, including the Philippines.
There are many reasons to stay bullish on Philippine stocks over the long term such as their very cheap valuations and our country’s bigger dependence on the domestic economy which makes us less vulnerable to global economic weakness. However, the abundance of existing threats will make it difficult for stocks to recover in the short term.
As such, investors who buy stocks today should have a longer term perspective, focusing on fundamentally solid large cap issues that are trading at cheap valuations and are paying cash dividends. INQ
