Home Banking Report Vaccine rollouts, coronavirus surge, and stricter lockdowns: Financial markets on a spin...
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FINANCIAL MARKETS in the first quarter of 2021 continued to be driven by developments surrounding the coronavirus disease 2019 (COVID-19) pandemic with the arrival of vaccines lifting investor sentiment in the early part of the quarter before being offset by the renewed strict lockdowns due to a fresh surge in coronavirus cases.
The barometer Philippine Stock Exchange index (PSEi) averaged 6,886.50 in the January-March period, up 2.5% on a quarter-on-quarter basis. On an end-period basis, however, the index was down 9.8% to 6,443.09 from 7,139.71 the previous quarter.
Meanwhile, the peso averaged P48.28 against the dollar in the first quarter, depreciating 0.03% from the previous quarter’s average of P48.27:$1, data by the Bangko Sentral ng Pilipinas (BSP) showed. However, the local unit appreciated 5.01% compared with the P50.83-to-a-dollar average seen in the first quarter of 2020.
Treasury bill (T-bill auctions) conducted in the first three months of 2021 continued to see robust demand, data by the Bureau of the Treasury showed. Total subscriptions in these T-bills reaching around P978.15 billion, which is around 3.4 times the P286-billion aggregate offered amount.
This oversubscription amount of P692.15 billion was higher compared with the P688.91 billion posted in the previous quarter.
Similarly, auctions of Treasury bonds (T-bonds) during the period posted a total subscription amount of P348.47 billion, around 2.3 times more than the offered amount of P150 billion.
At the secondary bond market, domestic yields were higher by a range of 10.6 bps for the 182-day T-bill to the 141.3 bps for the 10-year paper compared with end-December 2020 levels.
Yields rose across the board on a quarter-on-quarter basis. In the first quarter, rates were higher by an average of 73 bps during the reference period, according to the PHP Bloomberg Valuation Service Reference Rates published on the Philippine Dealing System’s website.
“The performance of the country’s equities, foreign exchange and fixed-income markets remains to be influenced by COVID-19-related developments, liquidity conditions, inflation and inflation expectations and the pace of domestic economic recovery,” the BSP said in an e-mail.
The BSP added investor sentiment was lifted by its implementation of monetary stimulus and its accommodative monetary policy, as well as optimism over the passage of key legislative measures aimed toward assisting in economic recovery.
The country started immunizing its most vulnerable people against the coronavirus on March 1 after receiving 600,000 doses of CoronaVac donated by China. The government hopes to vaccinate about 50 million people this year.
The first quarter saw the release of the country’s fourth-quarter gross domestic product (GDP) performance at an annual decline of 8.3%, a slight improvement from previous quarters but still brought the economy to its sharpest decline since the 1940s at 9.6% — near the low-end of the government’s -9.5% to -8.5% estimate range for the year.
The three-month period also saw the passage of the Financial Institutions Strategic Transfer (FIST) Bill (now Republic Act No. 11523) and the Tax Incentives for Enterprises (CREATE) Bill (Republic Act No. 11534) on Feb. 16 and March 26, respectively.
CREATE will lower corporate income tax to 25% from 30% starting July 2020, and then by one percentage point each year from 2023 until it reaches 20% in 2027. The rate immediately falls to 20% for local small companies. It also streamlines the tax incentives system to make it more time-bound and performance-based.
Meanwhile, FIST allows banks to clean up their books by selling their soured loans to so-called Financial Institutions Strategic Transfer Corporations (FISTCs).
The BSP also pointed to optimism over the passage of House Bill No. 8628 or the Bayanihan to Arise as One Act (Bayanihan III), which may become the country’s third and largest COVID stimulus package as it allocates P420 billion in subsidies to affected Filipino families and businesses. As of May 21, it is on its way to the plenary floor of the House of Representatives for deliberations.
WHAT INDICATORS TO WATCH OUT FOR
BusinessWorld asked analysts what indicators the market should be on the lookout for on the months ahead.
ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said investors will continue to monitor COVID-19 and the pace of vaccination rollouts given these are tied to safely reopen the economy.
“Meanwhile, inflation and its path will weigh on the bond markets and the stance of BSP. Lastly, growth and the possible reaction from credit ratings agencies will likely be followed as several ratings agencies have since downgraded their growth forecasts for the Philippines, a clear sign that the shine from the Philippines’ once prominent growth story has indeed faded,” Mr. Mapa said.
Domestic headline inflation averaged 4.5% in the first quarter, according to the BSP’s latest inflation rate. The figure was higher than the fourth quarter’s 3.1% and last year’s 2.7% readings, respectively, as well as higher than the government’s 2-4% target range for average inflation this year.
Security Bank Corp. Chief Economist Robert Dan J. Roces said that aside from inflation and vaccines, inflation and inflation expectations in the US “will be worth monitoring as this spurs a global reflection view that could drive commodities higher.”
“International crude prices could be a harbinger of local inflation upside risks,” Mr. Roces added.
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said to watch out for the trend in new COVID-19 local cases. “The estimated increase in new COVID-19 vaccine arrivals especially by [the third or fourth quarter 2021] would help reduce further new COVID-19 cases that, in turn, help justify additional measures to reopen the economy that lead to faster economic recovery, he said.
For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion: “Should local COVID-19 cases continue to surge and vaccine rollouts be sluggish, the external account should be monitored as it was the one that provided us some buffer against the 2020 COVID shocks. Notably, rising official reserves has safeguarded import cover and external creditor status,” he said.
Mr. Asuncion also said to keep an eye on the country’s purchasing managers’ index (PMI) as it “gives a good view of current and future business conditions.”
As of the first quarter, the country’s balance of payments (BoP) — which shows a glimpse of the country’s transactions with the rest of the world — posted a $2.844-billion deficit, surging from the $68-million gap during the same period in 2020.
The March BoP position reflects gross international reserves worth $104.48 billion, 0.64% lower than the $105.16 billion as of end-February. The end-March dollar reserves level is enough to shield the economy against external shocks, as it is equivalent to 12 months’ worth of imports, as well as about 7.3 times the country’s short-term external debt based on original maturity and 5.2 times based on residual maturity, according to the BSP.
Meanwhile, latest PMI data by IHS Markit shows the Philippine index at 49 in April, down from 52.2 March and snapping a three-month climb. A PMI of above the neutral 50 mark separates business expansion from contraction based on the respondents surveyed.
OUTLOOK ON FINANCIAL MARKETS
With these developments in mind, below are the BSP’s and analysts’ outlook for each of the key markets:
BSP: “Trading in the Philippine stock market in the next quarter is expected to remain volatile amid the continued rise in COVID-19 cases, the slow pace of vaccine rollout, and reimposition of quarantine restrictions. These could cloud recovery expectations and dampen investor sentiment. While the passage of key reforms may continue to boost investor sentiment, albeit temporarily, until recovery expectations improve, the PSEi is likely to continue to edge lower.”
Mr. Ricafort: “The local stock market would remain to be well supported amid the excess liquidity in the financial system, some of which search for higher dividend yields/returns, as well as prospects for capital gains/appreciation, in the equity markets.”
“On external factors, US stock markets continuously posting new record highs would also provide some support to the local stock market, amid liquidity-driven gains and the search for higher returns in riskier asset classes such as equities.”
Mr. Asuncion: “Should travel restrictions be heightened again in the second quarter, it’s going to take a toll on equities as manufacturing supply and demand suffer while consumer spending remains weak. We already saw this in April’s PMI Manufacturing index at 49.0 (previously at 52.2) so any similar occurrences will only drag market sentiment.”
Mr. Mapa: “Sideways as the economy remains stuck in low gear.”
Mr. Roces: “We are confident of better levels for the PSEi and this generally will be a function of sentiments on recovery, likely driven by vaccination progress news and easing lockdowns.”
BDO Unibank, Inc. Chief Market Strategist, Jonathan L. Ravelas: “The prospects of further reopening of the economy will be determined by the vaccine rollout and COVID-19 infection containment. This will help improve business and consumer confidence. Should these gain traction in the first half of 2021, then yearend of the PSEi could be well within 7,000-7,300 levels.”
BSP: “Continued ample liquidity is expected to influence developments in the domestic bond market as the BSP maintains its supportive monetary policy settings and following its liquidity-enhancing measures to shore up market confidence. This is evident in the robust demand for government securities as indicated by the oversubscription consistently seen in the weekly BTr auctions.”
RCBC’s Mr. Ricafort: “Any improvement in economic recovery prospects especially with the expected increase in new COVID-19 vaccine arrivals and rollouts by third and fourth quarter of 2021 could limit any further downside in local bond yields, also as a function of the trend in the benchmark US interest rates amid faster economic recovery in some developed countries especially those with massive COVID-19 vaccinations.”
Mr. Asuncion: “Local fixed-income securities are still dependent on the progress of our own vaccine rollout and subsequent economic conditions. With GDP data for first quarter expected to be within a shallow negative territory, we’re likely to see the same dovish stance of the Monetary Board as downside risks will be further highlighted to prioritize economic aid amid the pandemic.”
Mr. Mapa: “Yields to dip modestly in reaction to decelerating inflation but end the year largely flat from current levels after tracking likely increase in US Treasuries.”
Mr. Roces: “Better-than-expected inflation print will favor the fixed-income market, but yields could track USTs due to a lack of other catalysts apart from inflation; gradual economic recovery has been priced-in. If the US reflation story gains momentum, fueled by large fiscal stimulus, further steepening of the US yield curve will likely continue to push long-term Peso GS yields higher.”
Mr. Ravelas: “Inflation is seen to remain elevated as global commodities prices rise as development economies reopening is gaining traction. As a result domestic interest rates will move sideways to up in the medium term as inflation persists.”
FOREIGN EXCHANGE MARKET
BSP: “For the second quarter of 2021, the peso should continue to reflect emerging demand and supply conditions in the FX market as well as developments in the external market including the increasing availability of the vaccine against COVID-19. The peso could be supported by the recovery of remittances, continued inflow of foreign investments and a bounce back of exports as world economic conditions improve.”
Mr. Ricafort: “Any pick up in economic activities in the coming months, especially if the economy reopens further from lockdowns, as may be justified if new COVID-19 cases ease further and if COVID-19 vaccine arrivals increase in the latter part of 2021, this could result to some pick up in imports and some increase in the demand for US dollars to pay for imports.”
Mr. Asuncion: “Nonetheless, improvements in OFW remittances is a force that’s likely to strengthen the Philippines as we saw a 5.1% increase in February, a speedy pick up from the previous month’s 1.7% decrease. Anticipated disinflation in the coming months will also contribute to PHP appreciation.”
Mr. Mapa: “Outperform the region with corporate demand still soft relative to pre-COVID levels as capital intensive investment outlays postponed until better times.”
Mr. Roces: “If inflation eases more than anticipated in second quarter, the USD strengthens on reflation trade, and import recovers on the back of easing lockdowns, then general direction will be for depreciation.”
Mr. Ravelas: “The local currency should weaken towards the P49.00 levels as import demand recovers from the slump as we reopen the economy as well as US dollar strength gains traction as US interest rates could rise to as much as 1.90/2.00 on the 10-year US Treasurer as their economy picks up.” — Lourdes O. Pilar