Despite this, the peso weakened, and foreign funds sold the market down—enough to knock the index back to the 5,900 level.
With expectations increasingly centered on economic contraction, the discussion of how interest rates affect the economy’s key drivers becomes more important than ever.
The valuation foundation
Interest rates primarily affect valuations through the discount rate. In stock valuations, analysts forecast a firm’s future cash flows, then discount them back to their present value.
The higher the discount rate—typically benchmarked to the Philippines’ 10-year government bond yield—the lower the present value of those future earnings.
Think of it this way: a peso earned ten years from now is worth much less than a peso today. As interest rates rise, the discount applied to future earnings becomes steeper.
This is why growth stocks, whose valuations rely heavily on earnings far into the future, tend to be hit the hardest when rates increase.
The impact is seen in the stock’s price immediately, even if the company’s fundamentals have not changed significantly.
Pricier borrowing
Borrowing rates are also greatly affected by upward revisions in policy rates, as this directly translates to higher borrowing costs for companies.
For capital-intensive sectors—mainly property, utilities, and telcos—this weighs heavily on earnings as interest expense trims more from their bottom line.
Developers with large project pipelines suddenly face wider financing spreads. Banks see net interest margin compression on the lending side.
Conglomerates with heavy debt loads find that the cost of rolling over that debt has gone up, effectively squeezing margins.
the smarter game.
Over the past few weeks, some corporates have already slashed capital expenditure plans in anticipation of slower economic activity, while top banks fortified their balance sheets by frontloading provisions to safeguard gains from a possible uptick in non-performing loans.
All these point to dampened loan demand as a result of rising credit costs.
Safety > gains
The biggest consequence for the equity market is that it forces investors to shift toward safer alternatives tied to rising interest rates.
When the BSP raises rates, government securities (treasury bills and bonds) start offering more attractive yields. Fund flows that may otherwise go into equities find a safer, more liquid home in fixed income. This dynamic suppresses demand for stocks and places a ceiling on how high valuations can go in a rising rate environment.
Think of it as a double whammy: rates going up make money more expensive to borrow, while skyrocketing oil prices make everything more expensive to run.
Businesses caught in the middle—those with high price sensitivity—are the most vulnerable. The ones worth watching are companies that can pass costs along or simply don’t need to. Until macroeconomic indicators turn favorable, playing defense now is
