The Philippine benchmark index (PSEi) ended Friday’s session down 0.23 percent, closing at 6,492.75, after the government reported that June inflation eased to 3.7 percent, below the average forecast of 3.9 percent by analysts.
Big picture
Inflation is a key metric for the Bangko Sentral ng Pilipinas in its interest rate decisions, as lower rates generally free up liquidity, which can be redeployed into investments like stocks, pushing prices higher.
Analysts have pointed to signs of foreign selling abating and increased retail interest but this has not yet translated to concrete gains in market valuations, with the PSEi trading just below the 2023 close of 6,450.
One reason for the stagnant moves is that many investors are sitting comfortably on their bond investments, said Nicky Franco, head of research at stockbrokerage firm Abacus Securities.
“A lot of funds are still tied up in bonds/bond funds and I don’t think there will be significant rotation until the BSP’s easing cycle is well underway,” Franco told InsiderPH.
“They’re going to wait because they’ll want to crystallize gains on their bond portfolios first. There’s also the fact that foreign investors still aren’t interested in Philippine equities,” he added.
Wait and see
Gabryle D. Aguila, head of equity research at stockbrokerage house Unicapital Securities, said investors want more clarity on the timing of interest rate cuts by the BSP and the US Federal Reserve before making big moves.
“Better clarity as we approach these key dates will be the defining factor that would see investors picking up the pace in pricing in better economic outcomes from the easing inflation trend,” he told InsiderPH.
Better second semester?
Both Franco and Aguila expect the PSEi to finish the year at 7,200, suggesting an upside of at least 10 percent.
“Should this month’s inflation reading reflect the factors considered by the BSP for its substantial reduction to its [full-year 2024] inflation expectations, we may be looking at a disinflationary trend in [the second quarter of 2024],” he said.
Inflation risk
Of course, inflation still poses a major risk and there is a chance for stocks to fall further.
“There are still some upside risks to inflation which may prove another false start. Middle Eastern escalation still poses a risk to oil prices. Likewise, the La Niña forecast may bring about agricultural damages from typhoons,” Aguila said.
For Franco, investors should strategically deploy capital especially during dips, adding that a market bottom is within sight.
“The PSEi is close to its historical low and we believe this chart is going to turn up soon and you will probably see better performance in the second half of this year,” he said in a separate presentation to investors on Thursday.
Miguel R. Camus has been a reporter covering various domestic business topics since 2009.
