Despite a volatile 2023, markets overall wrap up the year with positive returns

Global and Philippine Market Update
Dec. 29, 2023

Global Markets

Global Stocks surged in 2023, propelled by exceptional returns from the major tech companies.

• Despite facing significant challenges, global markets concluded the year with notable gains. Remarkably, a handful of tech giants — Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia, and Tesla – played a crucial role, contributing around 60% to the S&P 500’s 2023 growth. This surge is mainly driven by investors' confidence in artificial intelligence, with Nvidia experiencing an impressive increase of over 250% due to its pivotal role in AI technology.

• The likelihood of the Federal Reserve (Fed) cutting interest rates has shifted from being a question of “if” to “when.” Nearly all Fed officials anticipate at least one interest rate cut in the coming year, with the majority predicting a total of three cuts. The potential cuts are influenced by inflation approaching the central bank’s 2% target. An accommodative monetary policy stands to benefit both equities and the bond markets. Lower yields result in reduced borrowing costs for corporate expansion and significant capital gains for bond holders. However, it’s not a guaranteed outcome, as the appropriate monetary policy in the future hinges on the economy’s performance.
• According to a survey by Natixis SA, geopolitical flashpoints will be the most significant risk to the global economy and markets in 2024. The survey, encompassing 500 institutional investors worldwide, revealed concerns about geopolitical disruptions, which could disrupt economic and market assumptions globally. This risk ranked higher than concerns related to consumer spending, central bank policy errors, and a slowing Chinese economy. The potential for increased tensions poses a threat to the global economy already grappling with elevated prices and borrowing costs. Research by Bloomberg Economics suggests that the economic cost of conflict in the current year may be the highest since the end of World War II.

Philippine Stocks

Philippine Stocks ended flat, facing persistent negative sentiment that lingered throughout the year. 

• The Philippine market struggled to achieve substantial returns in 2023 due to negative sentiment and the lack of foreign inflows. Factors such as persistently high inflation, and geopolitical tensions in Europe and the Middle East deterred investors from venturing into riskier assets. The prevalence of high bond yields failed to attract local investors who preferred the relative safety of fixed-income assets offering a decent return. Looking ahead to 2024, the expectation of declining yields amid easing inflation could serve as a catalyst, potentially enticing investors back to the local equity market in search of better returns.

• The National Economic and Development Secretary (NEDA) Secretary Arsenio Balisacan mentioned that even if the government falls short of its 6 to 7% target for this year, achieving an expansion of around 5.8 to 5.9% would still be a remarkable achievement. Looking ahead to 2024, the interagency Development Budget and Coordination Committee (DBCC) has adjusted its gross domestic product (GDP) growth target of 6.5 to 7.5%, down from previous 6.5 to 8% target. This negative outlook for the coming year is attributed to the prolonged El Niño dry spell which is expected to persist until the second quarter of 2024.
• According to S&P Global Market Intelligence, the Philippines is anticipated to achieve approximately 5.6% growth next year, supported by sustained robust private consumption, increased government infrastructure spending, and improved remittance inflows. However, this growth projection is below the government’s revised target range of 6.5 to 7.5% for 2024. Over the next decade, the Philippine economy is forecasted to maintain rapid growth, with total GDP expected to reach USD 800 billion by 2030, up from USD 440 billion this year. By 2033, the Philippines is anticipated to be part of the Asia-Pacific regions USD 1 trillion economies, joining mainland China, Japan, India, South Korea, Australia, Taiwan and Indonesia.   

Philippine Bonds

Philippine Bond yields remained elevated amid continued rate hikes throughout the year.

• Throughout the year, bond yields exhibited a flattening trend, with the short end rising and the long end decreasing. The spread between the 1-month rate and the 10-month rate is currently less than 100 basis points. Persistent high inflation and ongoing rate hikes contributed to pushing the short end of the curve higher. In recent months, inflation has decreased as the impact of monetary policy spreads throughout the economy, leading to a drop in the longer end of the curve. The impact is particularly noticeable in the 10-year, which was trading around 7% in late October but is currently trading around 6%.

• Fitch Ratings suggests that policy interest rates have likely peaked in the current cycle but anticipates a gradual decent. Fitch expects the next moves by the Fed, European Central Bank, and the Bank of England to be rate cuts, and these decisions often influence central banks in emerging markets, including the Bangko Sentral ng Pilipinas (BSP). Despite this, the BSP asserts that its policy decisions will be more dependent on economic data rather than actions taken by other central banks. However, in practice, the BSP may not entirely disregard global central bank actions and could potentially follow suit if major central banks initiate monetary easing sooner rather than later.

• The BSP is expected to commence rate cuts in mid to late 2024, which could stimulate economic growth by promoting consumer spending and business investments, provided inflation is kept in check. The BSP had raised borrowing costs by a total of 450 basis points from May 2022 to October 2023, reaching a 16-year high of 6.5%. Analysts project a 100-basis point cut next year as inflation is projected to end just above 4% in 2024 before settling within the BSP’s target range of 2 to 4% by 2025.

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://www.forbes.com/sites/greatspeculations/2023/12/26/2023-in-review-stock-market-resilience-and-the-rise-of-the-magnificent-seven/?sh=59bfe9f95c5c (2) https://edition.cnn.com/2023/12/19/business/fed-rate-cuts-2024/index.html (3) https://www.bloomberg.com/news/articles/2023-12-11/geopolitical-bad-actors-pose-biggest-threat-to-markets-in-2024-investors-say (4) https://business.inquirer.net/438609/ph-may-deliver-gdp-close-to-6-minimum-growth-target-this-year (5) https://www.philstar.com/business/2023/12/26/2321364/sp-unit-sees-philippines-growing-56-percent-2024 (6) https://business.inquirer.net/438605/fitch-policy-rates-may-have-hit-their-peak (7) https://www.bworldonline.com/special-reports/2023/12/27/565340/bsps-policy-easing-expected-to-support-economy-in-2024/