Negative sentiment causes global equities to decline while attractive valuations propel local stocks higher

Global and Philippine Market Update
Sept. 21 to Sept. 27, 2023

Global Markets

Global Stocks retreated as consumer confidence dropped and uncertainties surrounding China’s recovery dampened market sentiment.

• Rising gas prices and elevated interest rates have contributed to heightened economic uncertainty, resulting in a decrease in consumer confidence for September. The Consumer Confidence Index, as measured by The Conference Board, fell from 108.7 the previous month to 103. This marks the second-lowest level this year, just slightly above the 102.5 reading observed in May. Consumers are grappling with major challenges such as mounting credit card debt and a sluggish labor market. Consequently, this has led to a significant reduction in spending.

• Evergrande Group has missed another bond payment, intensifying uncertainties surrounding the future of the developer and the real estate sector. This missed payment deepened investor apprehensions, particularly following the company’s weekend warning that its efforts to restructure its debts were facing challenges. These concerns grew in the wake of a separate criminal investigation into its shadow banking unit, raising doubts about whether the property giant can successfully reorganize its debt. In the event the restructuring fails, the company might be pushed to liquidate, which could result in a chaotic collapse that would inflict further harm on the broader economy. Its worth noting that the property sector accounts for 30% of the country’s gross domestic product (GDP).
• The global economy exhibited better-than-expected performance in the first half of 2023. Although headline inflation has trended lower, driven by lower energy and food prices, it remains above central bank targets. In 2022, G20 countries witnessed inflation reaching 7.8%, but it has gradually receded and is projected to reach 6.0% in 2023 and 4.8% in 2024. The global economy has shown resilience but continues to face challenges, including elevated inflation, potential disruptions in oil and food markets, and ongoing uncertainty surrounding China’s recovery.

Philippine Stocks

Philippine Stocks rebounded to approach the 6,400 level, driven by bargain hunting amid attractive valuations.

• Philippine stocks are making gains as valuations become more appealing. The 12-month forward Price-to-Earnings (P/E) ratio is currently at 10.4x, the lowest since March 2020. The market received a boost from the buyout of Metro Pacific (MPI) by major shareholders, which released Php 28.4 billion of liquidity. While a significant portion of these funds may flow into bonds due to their high yields, some of it is expected to return to the equity market. Major fund houses will need to reinvest their excess cash into other index names which may push the market back to the 6,400 level.
• S&P Global Ratings anticipates that the Philippine economy will rebound to grow by 6% in 2024, as elevated inflation and borrowing costs gradually subside. The Philippines benefits from robust domestic demand and favorable demographics, boasting the youngest median age among ASEAN nations at 24.5 years old, which bodes well for future growth. Additionally, services make up a significant portion of the country’s exports, accounting for just under 30%. This helps shield the Philippines from a slowdown in global trade compared to its more trade-dependent neighbors.

Philippine Bonds

Philippine Bond yields edged higher in line with the spike in global bond yields.

• The Bureau of Treasury (BTr) rejected a reissued three-year treasury bond with a remaining term of two years and 11 months. The bond offering was undersubscribed but had the Treasury accepted all tenders, the average yield would have hit at 6.482%. This was 30.1 basis points higher than what was offered for the same bond series in the secondary market.

• The Bangko Sentral ng Pilipinas (BSP) kept rates unchanged for the fourth straight meeting but signaled that possibility of another hike if inflation pressure persists. BSP Governor Eli M. Remolona Jr. stated that had inflation been worse last month, the Monetary Board would have hiked rates. The BSP raised its full-year inflation forecast to 5.8% and its 2024 forecast to 3.5%. However, inflation is still projected to ease towards their 2-4% target by November in the absence of any supply-side shocks.

• BSP Governor Eli M. Remolona Jr believes the impact of tightening will continue to be felt until the first half of next year. There is a long lag before the full economic impact of monetary policy can be felt. The governor ruled out the possibility of rate cuts anytime soon and would require bad economic growth numbers and low inflation numbers before a cut can be considered. 

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://edition.cnn.com/2023/09/26/economy/evergrande-crisis-bond-payment-intl-hnk/index.html (2) https://edition.cnn.com/2023/09/26/economy/us-consumer-confidence-september/index.html (3) https://www.oecd.org/newsroom/positive-growth-continues-albeit-fragile-and-with-persistent-inflation-posing-a-key-risk.htm (4) https://blinks.bloomberg.com/news/stories/S1MRP3DWLU68 (5) https://blinks.bloomberg.com/news/stories/S1MHN4DWLU68 (6) https://www.bworldonline.com/top-stories/2023/09/27/547965/phl-economy-likely-to-bounce-back-in-2024/ (7) https://www.bworldonline.com/top-stories/2023/09/22/547210/impact-of-phl-monetary-policy-tightening-to-be-felt-until-next-year-bsp-chief/ (8) https://www.bworldonline.com/top-stories/2023/09/25/547402/upside-risks-may-prompt-bsp-to-tighten-policy-in-q4/ (9) https://www.bworldonline.com/banking-finance/2023/09/27/547958/govt-rejects-all-bids-for-reissued-3-year-t-bonds/ (10) Pinebridge Asia Market Outlook September 2023

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.