The Market Call | June 2024

Macroeconomy

May not only brought some rains but also good economic data sufficiently robust to boost our confidence that Q2 GDP will expand by 6.1% YoY and full year by 6.2% as an acceleration shall occur in H2. This view receives support from the ability of the National Government (NG) to ramp up infrastructure spending as it did in April while maintaining fiscal space, higher employment levels and a modest recovery of exports and manufacturing. Consumer spending in H2 should also benefit from slowing inflation which should average 3.1% YoY by Q4, and full year of 3.5%. However, the dollar-peso will remain challenged until the U.S. Fed cuts its policy rate by 25 bps in September.

Fixed Income Outlook

Bond investors will likely benefit from lower bond yields in Q3 as markets price in a Fed rate cut of 25 bps in September and lower average inflation rate of 3.4% in Q3 on its way to 3.1% in Q4. A slightly higher borrowing requirement of the NG could temper the fall in yields, but that can be avoided if it decides to source the funding from abroad.

Equities Outlook

PSEi will probably hover within the 6,100 to 6,500 range until August with a downward bias due to the regional geopolitical tension, coupled with the uncertainties that MSCI rebalancing in August creates. Factors that could drive the PSEi above this range include (1) the BSP lowering its policy rate by 25 bps in its August meeting (unlikely to do it before the Fed cuts its rates first only by September), (2) Q2 GDP growth exceeding 6.0%, and (3) strong corporate earnings growth for Q2. We see the latter two highly likely to happen, while the first one is contingent on the inflation data for June and July. We also maintain our forecast range of 7,000 to 7,500 for the PSEi in H2.