LOCAL EQUITIES

The Philippine equity market staged a meaningful recovery in June, with the PSE Index (PCOMP) advancing 4.65% to close at 6,037.17 despite heightened intra-month volatility. The benchmark briefly fell below the 6,000 level amid renewed geopolitical tensions between the U.S. and Iran, which weighed on the peso and risk sentiment, before rebounding sharply as geopolitical concerns eased. The strong month-end recovery fully reversed the market's losses from the previous two months, lifting second-quarter returns to 1.5% while narrowing the year-to-date decline to 0.3%, although domestic equities continued to underperform most global peers.

On the macro front, inflation provided a positive surprise as May CPI slowed to 6.8% year-on-year from 7.2% in April, significantly below both market expectations of 7.8% and the BSP's forecast range of 7.1%–7.9%. Nevertheless, the Bangko Sentral ng Pilipinas delivered a widely anticipated 25-basis-point policy rate hike to 4.75% and maintained a hawkish policy stance. Globally, easing expectations of a prolonged U.S.-Iran conflict drove crude oil prices materially lower through much of the month, tempering inflation concerns and supporting broader risk assets despite intermittent setbacks in diplomatic negotiations.

Domestically, sentiment also benefited from the filing of the Mynt (GCash) IPO, which is expected to be the largest in Philippine history and has reinforced expectations of stronger foreign investor participation and improved capital market liquidity.

Foreign investor activity remained net negative, although selling pressure moderated considerably. Net foreign outflows narrowed to US$22 million in June from US$150 million in May, bringing cumulative first-half 2026 net outflows to approximately US$245 million.

The on-going negotiations by US and Iran, and the accompanying drop in oil prices, should continue to provide support for Philippine equities. Despite this, upside will likely be capped in the short-term as we enter the corporate earnings season where companies are still expected to report weak earnings print as the second quarter still includes highly elevated oil prices. The GDP print for the second quarter is also expected to be weak with both business confidence and consumer expectations survey data showing deterioration in 2Q26 vs 1Q26. Nonetheless, the recovery narrative for the Philippines will be the highlight as we move forward towards end of 2026 and early 2027. The fiscal spending is also expected to accelerate in the second half of 2026 as we the Department of Budget and Management already released the allocations of infrastructure departments like Department of Public Works and Highways last May. We have shifted the portfolio positioning partly towards cyclicals as we capitalize on the low valuations and anticipated sequential improvements moving forward. Still, we are keeping some defensive names as the path towards recovery will still take time and still vulnerable to events like re-escalation of middle east conflict and the threat of El Nino.

FIXED INCOME (PHP)

Following the sharp sell-off in the previous month, local government securities (GS) yields declined across the curve in June as improving geopolitical sentiment helped ease market concerns over inflation and oil prices. The rally saw yields fall by 27–31 bps at the front end and by 49–68 bps across the belly and long end of the curve.

Inflation remained elevated but surprised to the downside, with May headline inflation easing to 6.8%, significantly below both the market consensus of 7.8% and April's 7.2% print. Meanwhile, crude oil prices retreated to below USD 70 per barrel after briefly surging above USD 110, helping reduce inflationary pressures and improve risk sentiment.

Despite the rally, investors remained cautious as the Bangko Sentral ng Pilipinas (BSP) raised its benchmark policy rate by 25 bps to 4.75%. The BSP also maintained a hawkish tone, signaling that further policy tightening—including the possibility of an off-cycle rate hike—remains on the table should inflationary pressures intensify.

Outlook

The GS market is likely to remain defensive while market participants continue to anticipate the de-escalation to progress. Over the medium term, concerns over inflation are likely to persist given expectations of second-round effects. BSP noted that May inflation was largely driven by the increases in electricity rates and vegetable prices offsetting the easing impact of lower oil and fertilizer costs, reinforcing upside risks to inflation. This backdrop is expected to continue weighing on sentiment towards local bonds.

USD Fixed Income

U.S. Treasury yields were influenced by competing macroeconomic and geopolitical developments throughout June, resulting in an elevated but volatile yield curve. On balance, yields moved higher across most tenors, rising by 3–23 bps, while the long end remained relatively unchanged.

Early in the month, Treasury yields were supported by a stronger-than-expected U.S. labor market. The economy added 172,000 jobs in May—more than double market expectations—while the unemployment rate remained steady at 4.3%. The resilient labor backdrop reinforced expectations that the Federal Reserve may need to keep interest rates higher for longer.

At the same time, inflationary concerns remained a key theme. U.S. headline inflation accelerated to 4.2% in May, its highest level in three years, largely driven by elevated energy prices amid the conflict involving Iran. Against this backdrop, the Federal Open Market Committee (FOMC) left its policy rate unchanged at 3.50%–3.75% during Kevin Warsh’s first meeting as Fed Chair, adopting a largely data-dependent, "wait-and-see" approach as policymakers weighed persistent inflation pressures against evolving labor market conditions.

Offsetting some of the upward pressure on yields, geopolitical tensions eased toward the latter part of the month after reports that the U.S. and Iran had reached an agreement to reopen the Strait of Hormuz. The development improved prospects for a de-escalation of the conflict and contributed to a sharp decline in oil prices, helping temper inflation expectations and limit further increases in Treasury yields.

Outlook

As developments for the de-escalation of the conflict progress, market participants will likely continue to be cautious. With inflation concerns still lingering and rate hikes still being speculated on, global yields may remain elevated, still leaning towards the higher-for-longer rate environment.