Maximizing returns on your bond portfolio
In times of turbulent markets and uncertainty, bond investors will need to turn to their trade plans to remind them of their goals.
It pays to plan. In times of rising global and local interest rates, a plan will keep you on track towards achieving your goals. Now more than ever, a trade plan will help you maximize your returns or keep you from losing money.
If you are looking to buy bonds, you can start with three questions: Are the funds to be invested intended for hold-to-maturity? Are you after the cash flows from coupons? Or are you aiming to make gains from trading?
These questions will help you to choose which among the wide selection of securities is best suited for your goals—considering the tenor and yield. They will help you determine your investment horizon, or the amount of time you can leave your funds invested before you need the proceeds.
However, if your goal is to take profit on existing holdings, either to reinvest in better yielding bonds or to liquidate positions, then setting target exit and entry levels is a must. Trade plans should have very specific target levels, which give the investor the benefit of estimating their gains.
When to buy, when to sell
They say that timing is everything, and this is especially true for bonds now. Investors would want to buy when yields are high (bond prices are low) and sell when yields are low (bond prices are high).
Forming a trade plan should always be guided by an outlook on interest rates. As a concrete example, major central banks around the world, as well as the Bangko Sentral ng Pilipinas (BSP), are currently looking at hiking rates throughout the year to quash inflation.
With the prospect of higher interest rates on the horizon, any price rally should be taken as an opportunity to take profit, especially in the short- to medium-term bonds, where new and better yielding bonds are likely to be offered.
Keep an eye on bond issuances
For those who are looking to buy peso bonds, it would also be valuable to pay attention to the weekly issuances of government securities by the Bureau of the Treasury (BTr) and to opportunistically participate in these auctions with a target yield.
This should give bond investors a better idea of where virtually “risk-free” peso rates are, which should also be helpful in comparing with higher-yielding corporate bonds. Needless to say, being up-to-date with new corporate bond issuances is also ideal.
When assessing which bonds or tenors offer good value, some traders often evaluate “yield spreads”. In bonds, the yield spread, or simply the “spread”, is the difference between two yields. Take, for example, a five-year peso government bond that yields 6% and a similarly-tenored five-year peso corporate bond that yields 7%. The difference is 1%, expressed as 100 basis points (bps).
On the other hand, if another five-year corporate bond from another issuer yields 7.40%, then the spread between the two corporate bonds is 40 bps. This 7.40% peso corporate bond would also offer a 140-basis point spread over the 6% peso government bond.
Compare with other bonds
Trade plans take into account a bond’s “relative value” and look at the spread that a particular security offers over comparable bonds. Comparable bonds are usually those that have the same risk rating, the same (or closely similar) issuers, across either the same or different tenors. Oftentimes, it is also important to consider the spread over the key benchmark interest rate.
Traders also look into the historical trends in spreads, to see whether a particular bond or tenor is already looking attractive at current levels. If seven-year peso government bonds offered a 200-basis point spread over the key policy rate five years ago, and high inflation now offers 400 bps in spread over the same benchmark, then some may consider this pick-up in yield spreads substantial.
Considering other factors such as the outlook for rates, other tenors, sentiment, etc., some may find this current pick-up in yield spreads a good entry level for a seven-year peso government bond.
Feeling the market
Lastly, market sentiment for risk is another important consideration when crafting trade plans. For example, if the market is not optimistic about the near future, a sell-off in short-term bonds would ensue, and market participants would favor longer-term bonds.
Short-term yields would then go higher, which would not bode well for holders of these short-term bonds. Therefore, anticipating market sentiment when planning where to reinvest bond proceeds should be done in a timely manner. Trade plans may also be updated from time to time, in keeping with the goal of being opportunistic with trades.
Overall, being guided by target entry or exit levels, as well as an assessment of relative valuation, are the most crucial benefits of a trade plan. Having said that, coming up with one could be very tricky in times of rapid increases in rates.
But don’t fret—you can always consult with your investment specialist to ask for timely trade strategies and market outlook. Luckily, Wealth Insights is also here to keep you abreast of the latest developments in the financial markets, top portfolio picks, and the latest trade plans.
PATTY MEMBREBE is a Financial Markets Analyst at Metrobank – Institutional Investors Coverage Division, under the Market Strategy and Advisory Section. She communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. She holds an AB Economics degree from Ateneo de Manila University and is currently pursuing graduate studies. On her free time, she enjoys watching indie films and watching gigs to support local indie music.
What to do when the peso plunges to a 17-year low
There are forces pushing the value of the dollar up. Increasing policy rates in the US are mostly to blame. For now, we continue to advocate buying on dips.
The Philippine peso has weakened sharply against the US dollar, trading close to PHP 55 to a dollar, a level not seen since November 2005. So far this year, the peso is down over 7% vs the greenback, making it the worst-performing ASEAN currency.
As all Asian currencies weakened against the US dollar in 2022, central banks in Asia are tapping into their stockpiles to bolster their weakening currencies.
Inflation happened. More specifically, it is the four-decade high inflation in the US, which has forced the US Federal Reserve to raise rates very quickly and by a lot more than initially expected.
On June 15, the Fed hiked its benchmark interest rate by 75 basis points (0.75 percentage points) to 1.5%-1.75%, the third consecutive rate increase in as many meetings, and the largest single rate hike since 1994. Leading up to the rate policy-setting meeting, Fed Chairman Jerome Powell signaled an increase closer to 50 bps, but after higher-than-expected inflation of 8.6% for May, the Fed decided time wasn’t on their side to cool inflation down. Just as critical, the Fed said that it will continue doing what’s needed until there’s evidence that inflation is slowing. From inflation shock, we’re now in a rate shock.
Global markets, including foreign exchange markets, immediately reset expectations on US rates to between 3.5%-4% by year-end 2022, up from 2.75% just a month ago.
The higher the interest rate of a currency, the more valuable that currency becomes, and with US interest rates rising faster than those of other countries, including the Philippines, the US dollar very quickly jumped higher against the peso.
Why won’t we keep pace with the Fed to defend the peso?
Because economic recovery comes first, at least for now.
The Philippine economic recovery remains precarious compared to the US and other advanced economies that came out of the pandemic much earlier. The Bangko Sentral ng Pilipinas (BSP) is therefore wary about hitting the brakes on growth by raising rates too early. A more gradual approach was deemed necessary.
The BSP started “normalizing” its benchmark policy rates from the historic-low 2% level, which was needed to support the economy during the pandemic, with a nice-and-easy 25-bp rate hike on May 19, two months after the Fed’s rate lift-off.
The BSP responded with another 25-bp hike in the following policy rate-setting meeting on June 23, after inflation registered a 5.40% year-on-year jump in May and on expectations of accelerating inflation.
Due to higher global oil and non-oil prices, combined with the continuing shortage in domestic food supply, particularly fish, the BSP raised its average inflation forecasts to 5% in 2022, from 4.6% previously, thereby implying average inflation of 5.6% in the 2nd half of 2022; and to 4.2% in 2023, from 3.9% previously, before tapering back to a 3.3% average in 2024.
The BSP’s two consecutive rate hikes have brought the policy rate to 2.5%, compared to the Fed Fund Rate’s current level of 1.75%, or a 75-bp interest rate differential compared to the historical average of 250 bps.
The interest rate differential of the BSP’s Overnight Rate and the Fed Funds Rate now stands at 75 basis points (bps) compared to the historical average of 250 bps.
Similar to the Fed, the BSP said it is prepared to take the necessary policy actions to bring inflation back to within the 2%-4% range target over the medium term, which includes further rate hikes through the second half of 2022.
However, given the divergent policy rate path between the Fed (aggressively “hawkish”) and the BSP (persistently “dovish”), this interest rate differential will narrow quickly, and might even turn negative (where the US interest rate is higher than the Philippine interest rate).
Metrobank Research Head Marc Bautista forecasts the BSP policy rate at 3% – 5% by year-end 2022, or another minimum 50-bp hike from here, significantly slower than the 175-bp to 225-bp expected cumulative rate hikes of the Fed.
We believe this is why the peso has weakened considerably against the US dollar and is at risk of weakening further, especially after incoming BSP Governor Felipe Medalla said that the BSP’s focus will be inflation, more than the exchange rate. This may be exacerbated as demand for the US dollar picks up ahead of peak import season in the third quarter.
Metrobank Research recently revised their exchange rate forecast to PHP 55.10 by year-end 2022 (up from PHP 53.40 previously) and PHP 56.50 by year-end 2023 (from PHP 54.70 previously), near the all-time high of PHP 56.45/USD 1 on March 31, 2004.
So what do we do now?
We’ve consistently been advocating buying the US dollar vs the peso on dips since last year. Our Financial Markets Analyst Patty Membrebe reiterated this view in her recent article, “Why buy the dollar on dips” published last May 30. Given our revised forecasts, we are keeping this strategy intact.
In the near-term, the peso appears technically oversold against the US dollar, which suggests room for a pull-back towards the 54.65-level, which could offer a window to accumulate dollars. Should the exchange rate break below this level, we see the next support at 54.50. For those who can afford to wait, the peso tends to get stronger against the dollar in the fourth quarter, when strong demand for imports goes down and seasonal OFW remittances go up.
RUBEN ZAMORA is First Vice-President and Head of Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank, which manages the bank’s relationships with Non-Bank Financial Institutions, including government financial institutions, insurance companies, and asset managers. He is also the bank’s Financial Markets Strategist, focusing on fixed Income and rates advisory for our high-net-worth-individual and institutional clients. He holds a Master’s in Business Administration from the University of Chicago Graduate School of Business. He is also an avid traveler and golfer.
Stock Market Weekly: Investors keep an eye out for FTSE rebalancing
We are looking at a few catalysts that will influence the movement of the stock market this week: the FTSE rebalancing and the release of the Purchasing Managers’ Indices (PMIs) of the Philippines and the US.
WHAT HAPPENED LAST WEEK
Last week, the Philippine Stock Exchange index (PSEi) fell by over 100 points to 6,217.56 ( down 1.8%, or by 114 points) following the Bangko Sentral ng Pilipinas’ (BSP) monetary policy rate setting and inflation expectations. The central bank has raised monetary policy rates by 25 basis points (bps) and revised its full-year inflation forecast to 5.0% for 2022 (from 4.6% previously) and 4.2% for 2023 (from 3.9% previously).
Furthermore, the sustained weakening of the peso exacerbated the market’s drop, sending the PSEi near the bear market territory last week. Nonetheless, losses were pared last Friday as the market bounced from oversold levels. The index breadth was negative, with 9 gainers versus 21 losers. The average daily turnover value was PHP 4.4 billion. Foreigners were net sellers by PHP 2.0 billion.
Jollibee (JFC), up 4.2%, was one of the index gainers after management said that it sees growth and expansion continuing this year following a strong start in the first quarter of 2022.
On the other hand, shares of Bank of the Philippine Islands (BPI) declined by 7.2% as the Philippine central bank’s less hawkish stance dragged the financials sector down last week.
WHAT TO EXPECT THIS WEEK
Given that the market remains at oversold levels, we see the market trading higher this week, especially amid possible quarter-end window dressing activities at the latter part of the week. However, the peso’s weakness, rising inflation pressures, and recession worries in the US will continue to influence sentiment and risk appetite. Moreover, investors will be on the lookout for the Financial Times Stock Exchange (FTSE) rebalancing today, June 27, as well as both the Philippine and US manufacturing PMIs (Purchasing Managers’ Indices) to be released on Friday.
STOCK PICKS FOR THE WEEK
Megaworld Corp. (MEG) – BUY
MEG has dropped by as much as 18% month-to-date, tracking the global market rout, amid fears of more aggressive rate hikes. Given the sharp drop, MEG has traded at extreme oversold levels on the daily chart, with its Relative Strength Index (RSI) at 18, the lowest since March 2020. Investors and aggressive bargain hunters can attempt to take advantage of the stock trading at oversold levels to ride the probable bounce. Note that MEG is still on a downtrend, so setting tight stops is recommended. Accumulating MEG at current levels is advisable. Set stop limit orders below PHP 2.10. Take profit at around PHP 2.50/PHP 2.60 .
Raslag Corp. (ASLAG) – BUY
After sliding by as much as 19% from its initial public offering (IPO) price two weeks after the listing date, ASLAG’s share price has rebounded by 26% week-to-date and is now trading above its IPO price of PHP 2.00. It expects revenues to grow significantly after its 18-megawatt peak (MWp) Raslag-3 solar plant begins full commercial operations. ASLAG added that it will start deploying the proceeds from its recent initial public offering to its next two solar power projects, with most of the funding allocated to the planned 35.159 MWp Raslag-4 solar plant in Magalang, Pampanga. Accumulating ASLAG once it breaks above PHP 2.10 is advisable. Set cut loss below PHP 1.98. Take profit at around PHP 2.30/PHP 2.40.
PSEi TECHNICAL ANALYSIS
Resistance: 6,400 / 6,800
Support: 6,180 / 5,700
The PSEi initially broke below the 6,180 support level last week but managed to quickly rebound after trading at oversold levels. PSEi’s RSI last week hit as low as 25, the lowest since January 2021. Nevertheless, the market is not out of the woods unless it breaks above its next resistance levels (6,400/6,800).
Continue setting stop limit orders, especially if the market fails to go back above 6,400 in the coming weeks. The next support levels are at 6,180/5,700.
KEY DATA RELEASES
- FTSE rebalancing today, June 27, 2022
- Philippine manufacturing PMI for June 2022 on Friday, July 1, 2022 (actual May 2022: 54.1)
- US manufacturing PMI for June 22 on Friday, July 1, 2022 (Preliminary: 52.4)
How leaders can supercharge their minds
Some of the most accomplished and wealthy individuals in the world meditate. They find something in it that helps them perform at their peak. Should you include it in your daily routine?
What do Microsoft founder Bill Gates, Huffington Post CEO Ariana Huffington, and NBA championship coach Phil Jackson have in common? Add to the list Twitter CEO Jack Dorsey, billionaire hedge fund manager Ray Dalio, and Linkedin CEO Jeff Weiner. Aside from being wildly successful in their respective fields, all these leaders practice meditation.
The science about the benefits of meditation is clear and irrefutable. These benefits can be explained by neuroplasticity, which is the brain’s ability to change in response to experiences. Neurons and neural pathways can rearrange and reorganize themselves during learning, growth or even adapt to an injury. Studies show that meditation thickens the brain’s pre-frontal cortex, which is the executive part of the brain in charge of decision making, analytical thinking, and other higher order functions.
Meditation trains the mind to be in the present moment and see reality clearly as it is. It teaches the mind to respond, rather than react, to what happens around us. So instead of being tossed around by life, chasing pleasures, and escaping pain, we cultivate clear comprehension to live more meaningful lives. For business leaders, it helps us to live life with intentionality of purpose.
“For me, it has nothing to do with faith or mysticism. It’s about taking a few minutes out of my day, learning how to pay attention to the thoughts in my head, and getting a little bit of distance from them,” writes Bill Gates.
How can you start your own meditation practice?
- Decide on a place and time to meditate. Choose a quiet spot in your home or office where you will not be disturbed for a few minutes. There are no special materials or equipment needed. You don’t need to light an incense or ring any bells. Your meditation time can be in the morning as soon as you wake up or at night before you go to bed.
- Start with five minutes of meditation and build your practice. You can start with five minutes of meditation if that’s all the time you have. It’s not so much the duration as it is the regularity of practice. Build it up to 10 minutes and eventually, longer.
- Sit down and focus on your breath. There are different anchors for meditation (like body sensations, sounds) as well as postures (such as standing, walking, lying down). For starters, you may consider beginning with sitting and focusing on the breath. Sit with your spine straight but not rigid. You can either close your eyes or keep them open with a soft gaze. Relax the body and begin your practice. Dr. Tamara Russell, in her book #WhatisMindfulness suggests the following steps:
a. Set your intention to attend to the sensations of the breath.
b. As best you can, maintain the focus of your attention on breathing, observing the air moving in and out of the body. This may be through the rise and fall of the belly or the chest, or the air going through the nostrils.
c. If your mind wanders (which it will, usually just after a few seconds), note the distraction.
d. Re-focus the attention on the breath. It’s ok to begin again and again.
- Try to incorporate mindfulness in your daily life. Try to do some tasks in a mindful way. For example, when you eat, just eat (not watching TV or using your phone). Start your next meeting with five mindful breaths to allow you to “arrive” in the meeting. Avoid multi-tasking.
Meditation is a practice to discipline the mind to observe what is happening as it is happening with curiosity and friendliness. Science has proven its efficacy in cultivating awareness, clarity, focus, kindness and so much more to make one a more effective leader. Successful CEOs swear by its value in their daily lives. Isn’t it about time that you try it?
JUDY CAPILI is the HR Business Partner Lead for Financial Markets and Institutional Banking. She is a Certified Mindfulness Teacher (CMT-P) accredited by the International Mindfulness Teachers Association (IMTA), having completed her teacher training from Engaged Mindfulness Institute (EMI). She leads Metrobank’s weekly Mindful Moments, a 30-minute drop-in meditation and reflection session for employees who need to de-stress over their lunch period.
Do you know the types of stocks you are invested in?
Knowing what type of stocks you own can help you come up with an appropriate investment strategy.
Before investing in stocks, you might want to first understand what you are getting yourself into. Classifying stocks is part of the process. Knowing the unique characteristics of stocks can help you make more informed decisions and choose the most suitable investment strategy.
There are more than 200 listed companies in the Philippine Stock Exchange (PSE). In which of these buckets do your stocks fall into?
One way to sort stocks is based on the investment management strategy, distinct characteristics, risk and valuation. They can be classified under growth, defensive, speculative, and cyclical.
There are various ways to classify stocks. Here are four classifications that you may use to manage your portfolio better.
Investors who hold growth stocks generally employ a passive investment strategy which does not require regular monitoring. An example would be Metro Pacific Investments Corporation (MPI), which is into services, products, and infrastructure: power, toll operations, water, healthcare, rail, logistics, and others. Another is International Container Terminal Services, Inc. (ICT), which is into the international container cargo business.
The underlying corporations have superior investment projects which explains the substantial portion of their profits being retained. These stocks are usually undervalued due to asymmetric information.
Just like growth stocks, defensive stocks can be held without much monitoring. Consumer staples and stocks in the utilities sector constitute this category. These are considered defensive as their businesses are more likely to withstand economic downturns, with low business risk, and moderate financial risk. This is because their products or services are necessities at any point in the economic cycle. These stocks provide regular dividends and stable earnings.
Some of these defensive stocks include Manila Electric Company (MER), an electricity distribution company that operates in the cities and municipalities of Bulacan, Cavite, Metro Manila, and Rizal. It also covers certain cities, municipalities, and barangays in the provinces of Batangas, Laguna, Pampanga, and Quezon. Manila Water Company, Inc. (MWC) is another. It provides water treatment, sewerage and sanitation, distribution services, pipe works, and management services to residential, commercial, and industrial customers.
Speculative stocks are for investors who are constantly monitoring their investments given that prices of these stocks are volatile. Sectors which are included in the category are mining and oil, and IT companies with little or unpredictable earnings. These stocks are held for speculating (betting) a significant change in the business that may unlock value in the company like surge in earnings, getting big customers, or part of a merger or acquisition transaction. Due to investors speculating for things to happen which may not be the case, these stocks are usually overvalued. This is an extreme example of high risk investment with high potential return or loss.
Examples of speculative stocks would be Semirara Mining and Power Corporation (SCC), a company that operates in Semirara Island, Caluya, Antique, and Nickel Asia Corporation (NIKL), which is engaged in the mining of all kinds of ore, metals, and minerals as well as power distribution.
Cyclical companies are generally held as part of an active investment strategy. Cyclical stocks have businesses that perform better with a favorable economic environment. Real estate and financial institutions are sectors included in this category. These stocks are heavily influenced by overall market sentiment and general economic activity. Superior returns are expected during economic expansions, and poorer results (compared with defensive stocks) during contraction. That is why volatility is expected in their asset values.
Some examples would be Ayala Land, Inc. (ALI), a real estate company, and Metropolitan Bank & Trust Company (MBT), one of the leading banks in the country.
After knowing the types of stocks, you should carefully evaluate your current or planned portfolio and assess if the stocks you are holding are appropriate to 1) the economic environment – you may want to invest more money in cyclical companies when high economic expansion is expected; 2) your risk appetite – you should remember that holding speculative stocks or some rumored backdoor listings can provide high returns, but also big losses; and 3) your investment horizon – though equities generally entail a longer holding period than other asset classes, growth stocks require even more patience from the investor versus speculative and cyclical stocks which can be tactical, and defensive stocks which pay regular dividends.
ANNA DOMINIQUE CUDIA, CSS, is the Head of Markets Research and Strategy at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to internal and external clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She has a Bachelor of Science in Business Administration degree, cum laude, from the University of the Philippines. She is also a CFA Level I exam passer, a Certified Securities Specialist, and a Global MBA (Finance) candidate at the University of London. She is a naturally curious person and likes to travel here and abroad.
Why government debt is not like household debt
It’s tempting to think that household debt is much like government debt. They’re different. And that’s good because it gives the government some flexibility to manage debt and spur the economy at the same time.
Consider a household where all the income available to pay off any kind of debt is around PHP 100 per annum and the total assets of that household amount to PHP 1,000. If they incur more debt and need to pay more than PHP 100 total per annum, then they will have to earn more revenues or sell some of their assets to pay off those debts.
Of course, they can borrow more to pay off their debts, perhaps as much as PHP 1,000 in total, until the day comes that their entire assets are gone, with the household going bankrupt as debt payments remain unpaid.
Deferring for the moment any discussion on where the debt is deployed, we now shift to governments. It happens that what’s true for households is not necessarily true for governments. Why? Because, as we’ve seen in our previous discussion on debt (See Understanding debt: Why the Philippines is not Sri Lanka), the government can always print more money to pay debt in its currency, and that is the principal difference between the government and a household. A household cannot print more legal tender to pay debt, but the government can, as long as the debt is in its own currency.
Therefore, the government can fund deficits with peso debt (e.g., “deficit spending”) in order to pay for current spending when needed. If deficit spending develops the country and funds growth, then that means that the tax base widens, giving the future government additional tax revenues that can then be used to pay off the debt that funded the growth. Essentially, the government is borrowing now against its future revenues.
This brings us back to the issue of where the debt is deployed. For the household, if the debt were incurred to generate income greater than the interest and principal repayments, there would be no problem. It’s considered an investment, and the household wealth goes up more than PHP 1,000 in return.
The same is true for the government if it invests for the future, borrowing money to develop the country (say, via infrastructure projects) and earn even more tax revenues in the future to pay off such debt. That is very much an investment as well.
Borrowing against future revenues
So, circling back to the point, the government can resort to deficit spending by essentially borrowing against future tax revenues. Households, on the other hand, cannot do the same and will have to borrow against an existing income stream, asset collateral, or both.
Thus, homey rules that may prove prudent for managing household debt can be very counterproductive and deleterious when applied to government debt; it’s as if having low government debt would be a virtue in and of itself.
If such were the case, then that would have simply put the government in a bind and would have limited its ability to stimulate the economy when needed, or deal with national emergencies such as the COVID pandemic.
For the latter, debt loads shot up because of the need to provide relief to the people and vaccinate the general population, clearly something that would have been unavailable if there were very stringent rules on incurring debt tied up to pure fiscal policy or investment returns. Clearly, household debt and government debt are not the same thing and should be treated differently.
MARC BAUTISTA, CFA, is Vice-President and Head of Research & Business Analytics at Metrobank, in charge of the Bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and loves learning other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.
Stock Market Weekly: Investors await BSP’s rate decision
This week, the Bangko Sentral ng Pilipinas (BSP) is widely expected to increase interest rates by 25 basis points. We’ll find out on Thursday.
WHAT HAPPENED LAST WEEK
The Philippine Stock Exchange index (PSEi) closed at 6,331.56, dropping by 3.04% week-on-week or by 198.48 points. The local index tracked global markets as concerns of a looming recession remained amid the US Fed’s aggressive monetary policy tightening and high inflationary environment.
The market traded lower at the start of the week after the US inflation print for May 2022 came in higher than expected at 8.6% (consensus estimate: 8.2%) – its highest level since December 1981. Investors continued to be sellers ahead of the US Fed policy decision last Thursday, though a relief rally ensued after the announcement of the US Fed’s widely anticipated 75-basis-point rate hike.
Top index performers were Emperador Emperador Inc. (EMP) up 5.3%, Bank of the Philippine Islands (BPI) up 2.4%, and SM Prime Holdings (SMPH) up 2.0%, while the index laggards were Wilcon Depot Inc. (WLCON) down 15.3%, Converge (CNVRG) down 13.5%, and Megaworld Corporation (MEG) down 13.1%. The index breadth was negative, with six gainers versus 24 losers. The average daily turnover value was PHP 6.7 billion. Foreigners were net sellers by PHP 3.7 billion.
WHAT TO EXPECT THIS WEEK
The market is expected to trade sideways as investors wait for fresh catalysts amid persisting global recession fears. Any key policy rate surprises from the BSP Monetary Board meeting on Thursday, June 23, 2022, may likely dictate the direction of the market for the week. Investors expect a 25 basis-point increase in rates.
On the international front, the US will have a shortened trading week as markets close for the Juneteenth holiday on Monday.
STOCK PICKS FOR THE WEEK
SM Prime Holdings, Inc. (SMPH) — BUY
SMPH recorded double-digit revenue growth in its malls, offices, and hotels segments in the first quarter of 2022. Moreover, SMPH still has a large headroom for earnings recovery with its large mall exposure and a robust residential segment, which will both benefit from the economy’s full reopening. Accumulate SMPH once it breaks above PHP 40.0. Set cut loss below PHP 39.00 and begin taking profits at around PHP 42.5/PHP 43.0. If you are a long-term investor, set it at PHP 45.0.
Figaro Coffee Group, Inc. (FCG) — BUY
FCG expects to end this year with about 150 stores across all brands, and to reach 300 by the end of 2029. Its share price is showing signs of bottoming out. FCG is retesting its 50-day moving average price, while the technical indicator MACD (moving average convergence divergence) is showing signs of turning bullish. Accumulate FCG once it breaks above PHP 0.56. Set cut loss below PHP 0.51. Take profit at around PHP 0.64/PHP 0.70.
Converge ICT Solutions, Inc. (CNVRG) — BUY
The stock is extremely oversold after breaking down below its PHP 21.50 support level. CNVRG benefits from the recently signed Republic Act No. 11659 amending the 85- year-old Public Service Act (PSA), which removes the 40% foreign ownership limit that applies to public service companies. Bargain hunters may accumulate at current prices and set tight stops below PHP 19.00.
PSEi TECHNICAL ANALYSIS
Resistance: 6,400 / 6,800
Support: 6,180 / 5,700
The PSEi broke another support level (6,400) last week, hitting another year-to-date low. The market is now poised to retest its 2021 support at around 6,180. Technical indicator MACD confirms the bearish momentum.
Continue setting stop limit orders, especially below 6,400 to protect capital. The next support levels are at 6,180/5,700.
KEY DATA RELEASES
Thursday, June 23, 2022
– BSP interest rate decision (consensus estimate: +25 bps)
Getting real, or nominal, with our GDP
Our nominal GDP grew by 12.8% in the first three months of 2022. The real GDP, however, is 8.3%. What matters is the number which reflects actual growth and how it affects our debt-to-GDP ratio.
Yes, it’s true. The country’s GDP considerably expanded by 12.8 percent during the first quarter of 2022, remarkably exceeding expectations.
Many people may not be aware of this substantial recovery. It’s not surprising because statistical agencies and news outlets reported 8.3 percent growth instead. But why is there a disparity? Which one should be considered?
The 12.8 percent figure is the nominal GDP growth rate of the country during the 1st quarter of 2022, while 8.3 percent is the real GDP growth rate. The difference between nominal and real GDP is that the former accounts for inflation while the latter does not.
This is where the GDP deflator comes in. For simplicity, the difference between nominal GDP and real GDP can be called the GDP deflator, and it is a measure of the effects of inflation relative to the base year. Hence, a GDP deflator would mean that today’s nominal GDP will “get deflated” by taking away the effects of inflation when GDP is expressed in the base year, or real GDP.
In the example above, the nominal value of PHP 410 “gets deflated” or shrinks to PHP 320 when expressed in real values indexed to the year 2018. That is, PHP 410 is the price now and PHP 320 is the corresponding value in 2018 prices.
When one wants to measure the rise in production over time without the influence of rising prices, then the measure of GDP should be at constant prices or prices from another year, usually called the base or index year. For the Philippines, 2018 is the base year for GDP.
This is the reason why news outlets or statistical agencies use real GDP to calculate GDP growth – they want to determine the expansion/contraction in the economy’s output without the effects of inflation.
But we do not live in the index or base year, i.e., we live in the “now”, at current prices. In the example, we are dealing with PHP 410 rather than PHP 320. This illustrates the importance of nominal values; investors are more concerned about current price levels rather than prices in 2018, and when people look at their salary, loans, expenses, etc., what they consider are current prices or values.
Nominal GDP is then crucial because it gives a snapshot of a country’s total output valued at the prices for which it was actually sold. In addition, nominal GDP is used for comparison purposes with other economic measures that are not adjusted for inflation.
An example of this is debt. Since debt is always in nominal terms, nominal GDP is the correct variable to employ to come up with a commonly observed metric called the debt-to-GDP ratio. In this case, the GDP denominator is even growing at a faster 12.8% nominal GDP growth clip than the 8.3% real GDP print, which should shrink the debt-to-GDP ratio faster.
Moving forward, a recovery in 2022 is still the call, with good nominal GDP prints expected. This is because there will likely be higher output because of more relaxed restrictions owing to the relatively low COVID-19 cases in the past months. There is also the continued infrastructure spending by the incoming government, especially its focus on growth rather than spending cuts, as highlighted by incoming Finance Chief Benjamin Diokno.
Yes, the real GDP print numbers might look smaller because of current high inflation. Nevertheless, it is still the nominal GDP numbers that will have bearing with regard to actual current growth and shrinking the debt-to-GDP ratio. And that is all good.
ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.
Global high inflation: A supply-side problem
The world is struggling to contain soaring inflation. While many central banks resort to monetary policy tools, more effective solutions lie in facilitating the flow of goods.
Recently, global equity markets, especially in the US, have tumbled and gone into bearish territory (with the NASDAQ and the S&P500 dropping at least 20% in index value). This is coming mainly from the fear of high inflation pushing central banks, such as the US Federal Reserve, to hike rates aggressively and inadvertently push the economy into a recession, a so-called “hard landing”.
Rate hikes are supposed to cool down demand by pushing up the cost of borrowing, making it less attractive for borrowers to push through with their economic activities. Additionally, it can push investors to simply park their funds in competitively priced safe assets to offset inflation, further bringing down activity in the real economy and thus helping bring down inflation.
The problem is that the current rounds of inflation are not coming from such demand-side pressures but more from supply-side issues. For one, the COVID lockdowns disrupted the global supply chains and caused huge bottlenecks and logistics constraints when demand did eventually come back.
In the US especially, the Biden administration reversed the energy policies of the previous administration and pushed for clean energy. Thus, with the start of the Russia-Ukraine war, sanctions and counter-sanctions have turned the energy markets upside down and have pushed up energy inflation, with the US in no position anymore to offset the oil supply disruptions given their policy reversals.
High food and energy prices
Food commodities have taken major collateral damage with the disruptions in fertilizer production and in the transportation of major food supplies, causing food inflation on top of energy inflation. The result has been a perfect storm wherein higher food and energy prices have been pushing up inflation prints all around the world, the Philippines included.
In the US, inflation threatens to hit double-digit numbers and markets are penciling in aggressive Fed rate hikes in the coming meetings, with some opining about hikes of about 50-75 basis points per meeting.
However, it remains to be seen how effective these rate hikes will be since the problem is really the lack of energy and food commodities available globally. It can still certainly help bring down second-round effects coming from demand suppression resulting from the rate hikes, but unless supplies come back and normalize, it might take time for inflation rates to come back down again anytime soon.
More interest rate hikes
This means that, for the Philippines, interest rates are expected to continue going up. The Bangko Sentral ng Pilipinas (BSP) has already started hiking rates and is expected to hike all the way to August at least, perhaps even more afterwards.
The peso will continue depreciating as the Fed Fund rates go up, and, historically, the peso is very vulnerable to Fed rate action, appreciating when the Fed cuts rates and depreciating when the Fed hikes rates.
More importantly, there is now talk in the newspapers of the government taking on a neutral stance in order to be able to secure food and oil supplies from all sides relative to the Russia-Ukraine conflict. This appears to be a very logical step to take in the face of the real problem with the current high-inflation scenario: that it is supply-side driven and that we need supply-side solutions rather than finance-side solutions.
MARC BAUTISTA, CFA, is Vice-President and Head of Research & Business Analytics at Metrobank, in charge of the Bank’s macroeconomic, industry, and financial market analysis and research. He loves teaching finance and investments, portfolio management, statistics, financial derivatives, economics, etc. in a university setting. He plays guitar in a rock band and also loves learning other languages, especially Spanish, promoting its recovery as a heritage language in the Philippines.
Finding the right time to invest in REITs
Investing in REITs may be good for your investment portfolio. You probably have to wait a bit to maximize your returns.
There are many things to like about REITs.
They give you a chance to invest in real estate without having to construct a building yourself or buy land. You get dividends year in and year out. These dividends grow as the company grows. Furthermore, you will only be taxed 10%, compared to 15% capital gains tax for stocks or 20% for government securities. For corporations who invest in REITs, dividends are tax-free.
REITs or real estate investment trusts are companies that own or manage real estate. They invest in various properties such as office buildings, malls, hotels, hospitals, warehouses, apartment buildings, etc. They are also mandated to give out most of their net income, at least 90%, as dividends to stockholders.
“These properties have something called the escalation rate,” said Emuel Olimpo, Merobank Investment Officer. He has been avidly studying REITs for Metrobank and its clients.
“The potential total revenue and the total dividends that REITs will be paying out will continue to grow. That is normally 5% to 10% growth every year per their contracts with their tenants,” he explained.
There are a few REITs you can choose from: Ayala REIT (AREIT), Double Dragon REIT (DDMP REIT), Filinvest REIT (FilREIT), Robinsons Land REIT (RL Commercial REIT), Citicore REIT (Citicore), and Megaworld REIT (MREIT).
REITs vs government securities
With all the benefits just mentioned, REITs seem to be an ideal investment. For Olimpo, however, any investment should always be compared to other comparable investment instruments.
He said government securities, which also provide steady income, are a good benchmark for anyone interested in investing in REITs. The difference, however, is that, unlike REITs, fixed income instruments such as government securities can’t give more than their original coupon rate throughout the term of the bond.
“Of course, if property rental rates go down, dividend payouts for REITs could also take a hit. But the current REITs all have best-in-class and premium properties that make them resilient,” he explained.
“If the dividend yield for a REIT is 6%, and fixed income or government securities offer 5%, then it’s a no-brainer. You choose REITs. Right now, however, dividend yields have fallen in line with fixed income,” said Olimpo.
Because government securities offer a safer alternative, Olimpo believes it’s best not to invest in REITs at this time, especially since the situation may not change in the next two years or so.
But still, for those who think long term, perhaps five years or 10 years, there’s definitely value in REITs.
“The most exciting thing about REITs is their property infusions,” said Olimpo. “Once we see those infusions happen, investors should be ready to capitalize on the opportunity.”
These property infusions occur when the parent company includes new properties in the REIT. For example, if a REIT starts out with some 200,000 square meters of real estate, it may later be injected with new properties to grow its portfolio, which will ultimately benefit investors because of more dividends.
It may not be the perfect time to invest in REITs right now, but for Olimpo, that chance to invest may come soon enough.
ANTHONY O. ALCANTARA is the editor-in-chief of Wealth Insights. He has over 20 years of experience in corporate communications and has a master’s degree in technology management from the University of the Philippines. When not at work, he goes out on epic adventures with his family, practices Aikido, and sings in a church choir.