The Market Call | December 2020

Macroeconomy

The further opening of the economy, the relaxation of lockdown restrictions due to the country’s winning stance against COVID-19 even without the expected rollout of vaccines and the usually ebullient Christmas season spending, provide the ingredients for a robust economic recovery. Despite their recent runup, crude oil prices remain relatively low and this means that OFW remittances will more than offset the balance of trade deficits in 2020-2021, resulting in higher GIR (already at record highs). The country’s winning stance in the battle against the pandemic underpins the growing optimism.

Fixed-Income Market

In addition to the improved optimism of firms and consumers, the bond market needs more liquidity for longer term yields to go down again. Since we view the November inflation uptick as temporary and the U.S. Fed remains committed to very low interest rates until 2024, we now see leeway for BSP to provide more liquidity via a policy rate cut of 25 bps and/or reduction of reserve requirement ratio (RRR) and/or more purchases of U.S. dollars in Q1-2021.

Equities Market

The earnings recovery in Q3 kept PSEi above 7,000 up to mid-December as business and consumer confidence were restored. This brought back local investors to the equities market despite the ambivalence of foreign investors. Nonetheless, the more definitive economic recovery that we expect in 2021, still requires some selectivity since we will likely see some more volatility in the first half.