Most economists and market analysts believe that global liquidity will remain significant this year on the back of stimulus measures implemented by governments around the world.
For instance, the move of the US Federal Reserve to keep interest rates at historic lows makes funds in the United States more affordable and accessible. Moreover, bailout funds approved by policymakers to address the financial crisis in the eurozone also add to global liquidity.
But while more money is being injected in advanced economies, emerging markets are also expected to feel the effects of significant global liquidity via inflows of foreign portfolio investments.
In the case of the Philippines, liquidity is expected to continue rising this year. Economic managers said economic growth projections are anchored on expectations that income levels will rise.
Amid forecasts of robust liquidity, both in the domestic and global fronts, capital markets are expected to enjoy higher trade volumes this year.
Investors may choose from either fixed-income securities or equities, depending on their state of mind. The more cautious investor may gravitate to fixed-income securities, while the bolder one tends to pick equities.
This year, equities are likely to attract more investors due to the favorable economic developments both in the global and domestic fronts, said Arjuna Mahendran, HSBC’s head of investment strategy for Asia.
When economic outlook is improving, he explained, fund owners tend to go for riskier yet higher yielding instruments, such as equities.
Favorable developments seen since the start of the year include improving employment situation in the United States, efforts to contain the crisis in the eurozone, and brighter growth projections for emerging markets like the Philippines.
After a poor showing in 2011, the United States is now expected to recover faster this year as indicated by its declining unemployment rate and rising retail sales.
Meantime, the European Union is extending a second bailout fund for Greece, preventing the debt-ridden country from defaulting on its obligations.
On the domestic front, the Philippine government has committed to increase public spending to accelerate growth of the economy.
“We think that the emerging markets trade is the right one in the medium term given that the world’s major economies are enjoying a liquidity-fed respite this year and that debt problems are not likely to spread financial sector implosion,” Mahendran said. “As long as these conditions persist, equities will be favored by investors over low-yielding fixed-income securities.”
Likewise, Jonathan Ravelas of Banco de Oro said investors would likely prefer equities over fixed-income securities this year. He said the record-low interest rates would drive fund owners to instruments from which they could earn more.
“There will be a shift more to equities, which offers higher yields,” Ravelas said. In times when interest rates are low, investors tend to have less appetite for fixed-income securities, such as government securities,” Ravales said.
So far this year, the Bangko Sentral ng Pilipinas has cut its key policy rates by 50 basis points. The move has brought down policy rates, which influence commercial interest rates, to historic lows of 4 and 6 percent for overnight borrowing and lending, respectively.
The rate reduction was meant to help accelerate growth of the economy. Officials said the BSP had the flexibility to cut rates in support of economic growth because inflation is expected to remain benign.
First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) likewise expect the equities market to perform favorably this year, saying economic conditions have improved and are likely to whet the risk appetite of investors.
“Odds of acute economic and financial distress are lower today than they were in 2011,” the two institutions said in the latest issue of their joint monthly publication, The Market Call.
“Global market conditions have improved incrementally, and this can be used to rationalize the rally in risky assets this year.”
Nonetheless, fixed income securities are still expected to trade briskly this year. Although some market players see equities to be the preferred investment option, the enormous liquidity in the market leaves room for growth in transactions involving fixed-income securities.
HSBC’s Mahendran said investor sentiment would not be positive all the time, and that there could be bouts of economic uncertainties that could prompt fund owners to seek safer havens such as those offered by fixed-income securities.
“It is almost certain that markets will alternate between hope and despair depending on the news flow and political developments, such as European debt resolution, Iran nuclear threat, etc., which are having an increasing impact on financial markets at the present time,” Mahendran said.
“Thus, when markets start to shift towards fear and despair, investors will rush for safe haven bonds over riskier high-yield securities and equities.”
Echoing a similar tune, BDO’s Ravelas said demand for fixed-income instruments would also grow this year. He said there would always be investors who would prefer to stay safe, and significant liquidity could prompt risk-averse investors to buy government securities.
“Although there may be more funds invested in equities this year, fixed-income securities will likewise experience significant amount of demand,” Ravelas said.
At a time when economies are awash in liquidity, market players said, there are enough funds to spread around in both equities and fixed-income markets.