Higher for longer interest rates pull equity markets lower

Global and Philippine Market Update
Sept. 14 to Sept. 20, 2023

Global Markets

Global Stocks declined due to concerns about the impact of higher oil prices on inflation.

• Oil prices continue to hover at elevated levels, with both Brent crude and US West Texas Intermediate (WTI) crude trading above USD 90 a barrel. This surge is on track for its biggest increase since Russia’s invasion of Ukraine in the first quarter of 2022. The production cuts implemented by Saudi Arabia and Russia have the potential to drive the market into a 2 million barrels per day deficit in the fourth quarter. This could result in additional inventory drawdowns and leave the market susceptible to further price spikes in 2024.

• Economic data from China improved in August. Industrial production saw a 4.5% year on year increase, surpassing expectations from a group of economists surveyed by Reuter. Retail sales also experienced significant growth, expanding by 4.6% year on year, notably higher than the 2.5% increase seen in July. There is a growing sense of optimism that Beijing’s stimulus measures are yielding positive results. The People’s Bank of China further contributed to this support with an unexpected 25 basis point reduction in its reserve requirement ratio (RRR), aimed at enhancing liquidity in the financial system.

• The Federal Reserve (Fed) opted to leave its benchmark interest rate unchanged but provided indications that rates are likely to remain elevated for a prolonged period, with one more hike anticipated this year. Fed Chair Jerome Powell emphasized the central bank’s commitment to maintaining restrictive policy rates until they are confident inflation is sustainably moving lower. The Fed aims to bring inflation down to 2% and believes they are nearing that goal. The latest projections suggest fund rates will gradually decrease to 5.1% in 2024, 3.9% in 2025, and 2.9% in 2026.

Philippine Stocks

Philippine Stocks breached the 6,100 level as foreigners retreated from the Philippine market.

• The Philippine Stock Exchange Index (PSEi) dipped below the 6,100 level, primarily driven by mounting worries regarding inflation and surging oil prices. There has been a sustained outflow of foreign investments from the Philippines this month, with net foreign selling reaching USD 276.35 million as of September 20. Furthermore, offshore inflationary pressures persist as global central banks maintain their stringent monetary policies to curb inflation.

• The Asian Development Bank (ADB) has reduced its gross domestic product (GDP) growth forecast to 5.7% due to elevated inflation dampening consumer spending. Additionally, decreased investments and a drop in exports have played a role in the downward revision of the forecast. In the second quarter, the Philippine economy expanded by a modest 4.3%, marked by a sluggish household consumption and a contraction in government spending. Nevertheless, the 2023 growth forecast for the Philippines remain the second highest among Southeast Asian economies, trailing only Vietnam at 5.8%.

• The Philippine is poised to lead Southeast Asia in economic growth for 2024, as forecasted by the ADB. GDP is anticipated to expand by 6.2%, with Vietnam following closely at 6% growth. The driving forces behind this growth will continue to be private consumption and government spending, while inflation is expected to stabilize. The outlook for the Philippines remains optimistic but it is not without some risks, which include a potential slowdown in major global economies, increasing geopolitical tensions, and persistently high global commodity prices.

Philippine Bonds

Philippine Bond yields dropped as investors are drawn to the higher rates offered.

• The Bureau of Treasury (BTr) fully awarded a reissued ten-year treasury bond with a remaining term of nine years and 11 months at an average rate of 6.42%. This was lower than 6.558% quoted for the paper when it was last offered on August 15. The auction was 2.2 times oversubscribed as investors continue to lock in the relatively high yield.

• The implementation of price caps on milled rice suggests a potential delay in policy rate hikes, as the BSP is likely to adopt a wait-and-see approach to assess the impact on inflation, as noted by HSBC Global Research. The decision to cap rice prices was prompted by a significant spike in the cost of this essential staple, soaring from Php40 to Php53 per kilogram. This surge was triggered by India’s announcement of restrictions on all varieties of rice exports.

FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.

Sources: (1) https://business.inquirer.net/421617/oil-climbs-on-supply-concerns-recovery-in-china-demand (2) https://www.cnnphilippines.com/business/2023/9/15/china-economic-data-improves-august.html (3) https://www.bworldonline.com/stock-market/2023/09/13/545380/psei-sinks-to-6100-level-amid-inflation-concerns/ (4) https://www.bworldonline.com/top-stories/2023/09/12/544899/fdi-inflows-fall-to-5-month-low-in-june/ (5) https://www.bworldonline.com/banking-finance/2023/09/20/546579/btr-makes-full-award-of-reissued-10-year-t-bonds-at-lower-yields/(6) https://business.inquirer.net/421771/price-caps-on-rice-seen-giving-bsp-room-to-pause-rate-hikes

Disclaimer: The purpose of this article is to inform and should not be taken as an advice or offer to purchase securities. Seek professional advice before making a decision based on this presentation. Information given does not represent the views of FWD and its agents and employees.