Pandemic to keep steering markets in 2nd half

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By Jobo E. Hernandez, Researcher

THE CORONAVIRUS disease 2019 (COVID-19) pandemic remained the primary driver of local financial markets in the second quarter of 2020 as market players continue to adjust expectations and digest a slew of economic reports published during the period.

In an e-mail to BusinessWorld, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno attributed several factors that weighed down domestic financial markets that include, among others, the economic losses following the extension of lockdowns imposed in most parts of the country, downgrades in economic outlook, concerns on potential increase of banks’ non-performance loans (NPLs), the slowdown in remittances from overseas Filipino workers (OFWs), sharp drop in global oil prices, and concerns over a “second wave” of COVID-19 infections across the globe.

The BSP official noted the decline during the quarter was “partly tempered” by developments that include the easing in local policy rates and quarantine measures starting June that allowed some businesses to reopen.

The strict lockdowns aimed at containing the spread of COVID-19 largely contributed to the decline in the country’s gross domestic product (GDP) by 0.7% in the first quarter. Reported in May, the first-quarter result was unexpected at the time since the lockdowns only began in March. This led analysts to expect the second quarter drop to be worse given the continued lockdowns spanned the entire three-month period. This was confirmed in early August as GDP declined by 16.5% in the second quarter — the largest contraction on record based on available government quarterly data dating back to 1981.


Starting in mid-March, a strict lockdown was imposed on much of the country up until May before quarantine rules were slowly eased starting June. As most of the strict lockdown measures occurred in the second quarter, analysts expect the economy to have already bottomed out during the quarter. As of this writing, Metro Manila is now under a general community quarantine until Sept. 30 subject to changes.

Meanwhile, headline inflation averaged 2.3% in the second quarter, slower than the 2.7% recorded in the previous quarter, and closer to the lower end of the BSP’s target range of 2-4%.

The period also saw the BSP’s Monetary Board slashing policy rates by 50 basis points (bps) each on its off-cycle meeting on April 16 and on its scheduled meeting on June 25. So far, the BSP has cut benchmark rates by 175 bps this year, bringing the overnight reverse repurchase, lending, and deposit facilities at record lows of 2.25%, 2.75%, and 1.75%, respectively.

Trading remained volatile in the equities market in the second quarter with the bellwether Philippine Stock Exchange Index (PSEi) closing from a range of as low as 5,342.3 in April 2 to as high as 6,583.8 in June 9. During the period, the PSEi averaged 5,839.23 — 15.3% lower than the first-quarter average of 6892.27.

Despite this, the quarter ended strong with the index closing at 6,207.7 on June 30, 16.7% higher compared to the PSEi close of 5,321.2 in the first quarter.

Meanwhile, debt paper auctions carried out during the second quarter saw robust demand. Treasury-bill (T-bill) auctions conducted in the April-June period saw total subscription amounting to around P1.4 trillion, around 3.6 times the P392-billion aggregate offered amount.

Treasury-bond (T-bond auctions) during the same period had a total subscription amount of around P489 billion, 2.7 times more than the offered amount of P180 billion.

In the secondary market, domestic yields were lower by a range of 138.7 bps for the 91-day T-bill to 230 bps for the two-year T-bonds compared to end-March levels. On average, yields were lower by 186.7 bps during the reference period, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.

The peso averaged P50.45 against the dollar in the second quarter, appreciating 0.74% from the previous quarter’s average of P50.83-to-a-dollar, BSP data showed.

“In the second half of the year, the financial markets will continue to face uncertainty and downside risks stemming from the COVID-19 pandemic. These include potential business closures due to continued supply chain and market disruption; the possibility of a renewed escalation of the outbreak that may require the re-imposition of some lockdown measures,” Mr. Diokno said.

Apart from prospects of economic growth, the central bank chief said investors would likely track the domestic inflation rate, PMI (purchasing managers’ index), employment rate, number of COVID-19 infections, and business and consumer confidence to guide their financial decisions.

Mr. Diokno said the BSP foresees a “U-shaped” quarterly recovery path for the Philippine economy.

“The trough of the contraction is in [second quarter] 2020 following the lockdown during the quarter. The economy could continue to contract in the [second half] 2020, although at a slower pace, as business operations gradually resume, and firms and households adjust to the post-pandemic conditions,” he said.

Private sector analysts expect a slow recovery.

“The second quarter was still all about the pandemic with investors and almost all Filipinos monitoring COVID-19 developments both here and abroad.  Earnings reports came in as expected (on the downside) while signs of slowing economic growth momentum surfaced (PMI and unemployment data) as well as manifested (strong peso as imports fell),”ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

“I expect negative GDP figures for the balance of the year, a base effect-induced bounce in 2021 and a lower growth trajectory for the Philippines from 2022 onwards,” Mr. Mapa noted, adding the Philippine is now entering a “dirty L-shaped” recovery trend that is characterized as the economy experiencing a substantial contraction followed by a period of stagnation.

For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion: “COVID-19 will continue to sway financial markets long after the outbreak has ended. Its implications to the different sectors (transportation, tourism, entertainment, retail) would last for a number of years. However, the extent to which it would affect these would mostly depend on the market’s risk appetite.”

“With the BSP stating that they would keep an ‘easy policy’ for the next two years, money supply would most likely remain relatively high, and would definitely have implications on the fixed income side,” he added.

For Security Bank Corp. Chief Economist Robert Dan J. Roces, the economy is expected to recover “at a gradual phase” by the third quarter due to the reopening of some business activities, but noted investor and consumer confidence “might remain withdrawn” until a vaccine becomes widely available and a fiscal plan is implemented.

“Although GDP growth has likely bottomed out in the second quarter, we expect the economy to recover in a more sluggish manner, which means that [the third- and fourth-quarter performance] would remain negative,” Mr. Roces said in an e-mail.

In a separate e-mail, the Bank of the Philippine Islands’ (BPI) Economics and Markets Research Team said volatility in the financial markets “will likely persist in the next quarters” as the pandemic persists.

“Only a vaccine or a significant improvement in the country’s health situation can completely remove this volatility,” BPI said.

Outlook summaries

BSP’s Mr. Diokno: [T]he Philippine equities market will continue to see volatility amid concerns over the prolonged spread of the COVID-19 virus and its negative impact on businesses and the economy (e.g., direct impact on production by creating supply chain and market disruption; and its financial impact on firms and financial markets).

Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort: Further reopening of the economies locally and worldwide and any further increase in business/economic capacity would help shore up valuations of some listed companies, from worst at the height/peak of the COVID-19 lockdowns.

UnionBank’s Mr. Asuncion: The equities market will perform slightly worse in the third quarter in light of the rapid increase in COVID-19 cases, but stock values may further drop if Metro Manila returns to a modified enhanced community quarantine. The PSEi may recover during the fourth quarter if cases decrease but will most likely not return to pre-COVID levels.

Security Bank’s Mr. Roces: Good time to buy with low prices. It is difficult to time the market but from a risk-reward standpoint, returns are already decent for the long-term investor. The market is currently not pricing in a vaccine to happen in the next 6 to 12 months, thus any developments earlier than that will surely benefit the market.

ING Bank’s Mr. Mapa: Equity markets may come under renewed pressure as earnings reports will likely be very weak given prospects for a sustained contraction.

Philippine National Bank (PNB): Our base case fair value estimate for the PSEi is currently at 5,572, while our bull case is at 6,672. In our view, the low interest rate environment would continue to provide support to share prices and prevent the index from falling close to the lows we saw in first quarter 2020 (PSE’s at 4,623 on March 19).

However, re-rating due to low valuations alone would no longer be enough. Instead, further upside from current levels would largely depend in the shape of the GDP recovery, which in turn would influence how fast corporate earnings would revert to pre-pandemic levels.

BPI: In the case of the local stock market, it may take some time before the index returns to pre-COVID levels. A substantial increase in consumer confidence is a prerequisite for this since most of the companies in the PSEi rely on household consumption.

BSP’s Mr. Diokno: The bond market is expected to continue to improve in the coming months, supported by the liquidity enhancing measures deployed by the BSP such as the purchases of government securities from the National Government (NG) under a repurchase agreement and banks in the secondary market.

RCBC’s Mr. Ricafort: Possible further monetary easing especially by way of further cuts in banks’ RRR and other regulatory relief measures amid relatively sluggish economic data or recovery prospects amid the recent spike in new COVID-19 cases, relatively benign inflation amid relatively weaker economic data, and the recent increase in excess peso liquidity in the financial system amid various liquidity infusion measures by monetary authorities would still help keep local interest rates relatively low…

However, offsetting risk factors for the fixed income market is any increase in supply…of bonds/fixed income securities locally and worldwide to finance the huge fiscal/economic stimulus measures versus COVID-19 and the resulting wider budget deficits that lead to some pick up in debt-to-GDP levels.

UnionBank’s Mr. Asuncion: Yields will continue to be down for the third quarter and the rest of the year as the central bank tries to stimulate the economy by injecting liquidity into the market.”

Security Bank’s Mr. Roces: We expect [fixed income] to remain well supported with good liquidity. The BSP aims to keep rates low so the downside risks to the market may be minimal, thus giving steady returns.

ING Bank’s Mr. Mapa: Accommodative monetary policy and low inflation should be supportive of bond markets, with particular downward pressure for the short end of the curve.  Depends now on the borrowing plan of the government.

PNB: For existing fixed income positions, mark-to-market gains largely depend on how much liquidity the BSP will inject in the system without using the policy rate, such as the RRR. With CPI growth climbing near the middle of the BSP’s 2-4% band, we believe that the most appropriate monetary accommodation tool for the BSP to support growth is no longer a policy rate cut. Instead, we believe it should implement another 200-bp cut in the RRR but keep the policy rate at 2.25%.

BPI: Local bond yields may remain low in the near term given the monetary support provided by the BSP. However, risks related to inflation and the exchange rate remain elevated and can put a floor on further policy rate cuts in the near term.

BSP’s Mr. Diokno: In the near term, the peso is expected to continue to reflect emerging demand and supply conditions in the FX market. The impact of weaker inflows owing to the decline in exports, tourism receipts, [overseas Filipino] remittances and capital inflows is expected to be offset by favorable investor sentiment over the strong position of the economy, relative to other emerging economies, in terms of debt management and FX cover.

RCBC’s Mr. Ricafort: The sharp decline in imports especially the height of the COVID-19 lockdowns and the relatively slow recovery thereof at the moment, as well as still lower global oil prices by more than US$20 since the start of 2020, have reduced the demand for US dollars that are needed to pay for the country’s import bills.

UnionBank’s Mr. Asuncion: The Philippine peso will likely continue its strength vis-à-vis the weakness of the US dollar due to the sheer number of projected coronavirus disease 2019 (COVID-19) cases in the US and how the Trump administration has responded to the pandemic.

Security Bank’s Mr. Roces: [W]ith the general weakness of the US dollar and [Overseas Filipino] remittance flows plus expected contractions in imports, [US dollar-peso] might see some sustained strength until the end of the year, with risks coming from rising COVID-19 cases and US-China trade headlines.

ING Bank’s Mr. Mapa: [Peso] should continue to outperform the region as corporate demand for the [dollar] remains tepid, given the deteriorating economic environment.  With the economic engines stalling, the need for imports has fallen just as sharply, pointing to a current account surplus for as long as the Philippines remains in recession.

PNB: We pencil in a 49 to 50 [US dollars-peso] by the end-2020 on the assumption that the Philippines’ import cover will remain close to 8.5 months.

BPI: The decline in imports and international travel may continue to support the peso. Furthermore, foreign portfolio inflows in the local bond market amid expectations of additional monetary easing may amplify the strength of the peso. However, a persistent and more severe decline in remittances may tilt the balance towards peso depreciation.