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Wednesday, November 22, 2017 | MANILA, PHILIPPINES
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   banking report
Date posted: Monday, May 30, 2016 | Manila, Philippines

1st Quarter Banking Report (2016)

Financial markets take breather after Fed pause

RELIEF. That was the mood in financial markets near the close of the first quarter after US Federal Reserve Chairperson Janet Yellen hinted of a slower liftoff. The dovish tone had all but erased the losses that greeted the start of 2016, and maybe some.

After hemorrhaging in the first month of the year, the tide of ‘hot money’ reversed, registering net inflows last February and March. At the close of the first quarter, the Philippine benchmark index was up by nearly four-and-a-quarter of a percent, with foreigners lapping up local stocks once more.

By end-April, the gains at the Philippine Stock Exchange index (PSEi) were trimmed to under 3%, especially after the Origanization of Petroleum Exporting Countries failed to stem the drop in oil prices. Portfolio funds again reverted to net outflows.

But as May was coming to a close, the PSEi was up 6.6%, with foreign net buying shooting up to P11.8 billion year-to-date.

At the foreign exchange market, the peso depreciated against the US dollar during the first two months of the year, but by March had returned to the P46-to-a-dollar range. In the fixed-income market, demand turned to the long end of the yield curve on account of the Fed’s dovishness and the Philippine government’s annual income tax surge in April.

We took the pulse of a number of financial market players on where they think the smart money is headed in the second half of the year. We begin with no less than the Governor of the Bangko Sentral ng Pilipinas (BSP):

BSP Governor
Amando M. Tetangco, Jr.:

“The slowdown in Fed normalization has so far resulted in the return of “risk on” sentiment among global investors. This was particularly evident in the first quarter of this year. Among emerging markets, “risk on” has been reflected in lower yields, stronger currencies, more bullish equities and tighter CDS (credit default swaps) spreads.

“Like in other EMEs (emerging market economies), the Philippine financial markets were affected by the global “risk on” sentiment. But in our case, there were other factors that came into play, including the uncertainty during the weeks around the elections.

“The yield curve for GS (government securities) in the secondary market shifted lower, with a steepening bias (whereby the shorter end fell more than the longer end). The peso followed the appreciating trend seen in currencies in the region, appreciating about 0.9% year-to-date. CDS spreads declined steeply starting February but gave up some of those gains in recent weeks. Nonetheless the current level of around 112 bps (basis points) is still lower than the highs of around 142 bps in mid-February. We saw an upward trend in the stock market, which has recently been more pronounced in the days post election.

“With our elections having been seen as peaceful, orderly and speedy, the domestic financial markets are generally upbeat and positive. Market participants will therefore now look again for signals from external developments. Local market participants will be listening for any changes in the tone of Fed officials. They will be watchful of shifts in global growth prospects and policy divergence among advanced economies; dynamics in the future path of oil prices; and growth rebalancing in China.

“Some global investors may take their time to re-enter the local market in a big way until the transition to the new administration is completed, but there will certainly be some who would weigh in favor of the country’s strong macrofundamentals even now.

“Domestic demand conditions remain buoyant, supported by solid private household and government spending, double digit growth in credit demand, adequate domestic liquidity conditions. Our external liquidity position remains robust. We have ample international reserves, sustained structural FX (foreign exchange) inflows from overseas Filipino remittances and foreign portfolio and direct investments. Our banking system continues to be stable, sound, adequately capitalized, liquid, and profitable.

“The long-term prospects of the economy remain intact. Therefore we see that there will be fundamental support for investments in our local debt instruments.”

Bank of the Philippine Islands
economist Nicholas Antonio T. Mapa:

“This will be very hard to call because the performance will hinge on several factors namely, the Fed decision, the BSP’s monetary policy stance in relation to its IRC (interest rate corridor) implementation and the transition of power. Should the Fed delay further, we may see some reprieve from the bond market and stocks as foreign portfolio flows return to the region.

“[N]egative effects may rear their ugly heads if inflation suddenly turns on the El Niño’s scourge on our crops, a hike by the BSP to defend its medium term inflation target and a severe financial fallout from the Fed hike.

Regina Capital Development Corp.
business development head
Luis A. Limlingan:

“The PSE has rallied… since the election...Historically, this is usual with the last three elections yielding double digit returns in the following 12 months.

“The index is expensive trading at 19 times this year’s expected earnings, but if we are to take what [incoming President Rodrigo R.] Duterte has done transforming Davao to Luzon, there are reasons to be optimistic. We still think the economic data and corporate earnings will continue to be the main drivers as the new administration policies won’t have their impacts felt until later in the year.”

*Send e-mail to Ranier at rrreusora@bworldonline.com or follow him on Twitter @rrreusora.

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