Falling Inflation, China Reopens Fuel Markets Up

Online stockbroker Colfinancial.com said investors shouldn’t worry too much about a potential stock market decline this year, as inflation concerns ease and China’s economic reopening.

April Tan, head of research at Colfinancial, said the two factors are driving the rise in local markets, which are now hovering around 7,000 since reaching 5,700 in September last year. On Friday, the Philippine Stock Exchange index closed at 7,042.70, stable compared to the previous day’s closing price.

There are compelling reasons why our market is going up, Tan said at a Colfinancial briefing to clients over the weekend.

Tan said that as commodity prices are falling, inflation is also starting to ease. Linked to this is the decline in inflation in the US, where successive rate hikes by the central bank last year to curb the rise in inflation contributed to the strong appreciation of the dollar. This prompted the Bangko Sentral ng Pilipinas (BSP) to continue raising rates to maintain a 100 basis point spread between the peso and the US dollar, fueling an aggressive rise in inflation in the process.

With inflation falling in the US, the financial market expects the US Fed to slow its rate hikes, and the BSP will follow suit, Tan said.

The market expectation is underlined by the fall in the US 10-year yield, which is now 3.5 percent from a high of 4.5 percent last year, Tan said.

In terms of peso rates, we peaked at almost 7.5 percent for the 10-year bond. But I think as of today we were already below 6 percent, she added.

Also optimistic about a better stock market performance this year is the expectation that the US economy will weather the resulting recession caused last year by the US Fed’s aggressive rate hikes.

The consensus economic forecast for the US for 2023 is that GDP will only slow down and not go into recession. And instead (will) still grow at 0.5 percent, Tan said.

Investors say the Fed has managed to keep inflation under control. Of course, inflation will not just fall steeply, but from a peak of 8 percent in 2022, inflation is expected to drop to 3.8 percent. There may be a slight increase in unemployment, but not to the extent that it would actually lead to a contraction in GDP, she added.

The decline in inflation raises market expectations that the US Fed will end its rate hike at 4.8 percent instead of 5 percent, suggesting it will cut rates this year or make a less aggressive rate hike compared to earlier statements, Tan said. .

A slowdown in US rate hikes will lead to a weakening of the dollar, which in turn will benefit emerging markets like the Philippines, Tan said.

Tan noted that emerging markets are currently outperforming developed markets such as the US.
The weak dollar is good for emerging markets because it would mean higher dollar returns for foreign fund managers, she said.

Tan also said that since the Philippines is largely a domestic economy, it is less sensitive to economic fluctuations abroad, such as the potential slowdown in the global economy.

Aside from that, we have the underperformance and cheaper valuations of emerging market equities, Tan also said.