In our previous article, the possible consequences of the US debt ceiling drama to the global economy, as well as to the Philippines, were laid out.

With about a week away from the reported x-date, or the date by which the US would be in default of its obligations, it should be interesting to see how the investment-grade (IG) and high-yield (HY) markets performed before and after a similar debt ceiling drama in the past.

An attempt will be made in this article with the help of Metrobank’s research partner, CreditSights, who published a report titled US Strategy: Debt Ceiling Defense on May 9, 2023. This may aid you in making decisions about your bond portfolio.

But let’s talk about bond spreads first. Bond spreads represent the difference in yields between riskier bonds, like HY or IG bonds, and safer investments, like US Treasuries. Spread widening occurs during periods of market uncertainty or economic distress, when investors demand higher yields for riskier bonds, resulting in wider spreads.

Revisiting 2011

It might be worthwhile to take a little trip down memory lane to 2011 when a similar debt ceiling drama occurred, reminiscent of the current situation. Back then, the US Congress postponed raising the debt ceiling until the last minute, leading to a not-so-pleasant consequence: a credit rating downgrade by S&P.

In the buildup to the 2011 debt ceiling deadline, the spreads for IG bonds initially widened three months before the x-date. However, as the deadline drew near, the pace of widening took a breather, gradually tightening up instead. (See table below.)

CreditSights found that IG spreads performed slightly worse in the past three months ending the 2nd week of May 2023, increasing by 28 basis points (bps) as against only 21 bps back in 2011.

This was primarily driven by lower-rated bonds, namely those rated A and BBB, due to concerns about the banking system and a potential recession this year, as opposed to 2011 when spreads for higher-rated bonds, such as AA, were affected the most.

In both instances, long-term IG bonds showed relative resilience compared to short-term and medium-term bonds.

In the high-yield market, spreads have also widened by 82 bps in the past three months ending the 2nd week of May, but less than the 103 bps in 2011. The recent widening has been more apparent in short-term bonds.

Among different credit ratings, lower-rated CCC bonds performed worse both in 2011 and recently. However, the performance of higher-rated bonds such as B and BB was relatively better than in 2011.

2023 debt ceiling crunch

With the deadline fast approaching, there’s a big possibility that negotiations on the debt ceiling might again stretch until the last minute. In such a scenario, there’s a chance for HY bond spreads, especially for lower-rated CCC bonds, to widen further.

This could have an impact on HY bonds across various tenors. However, it’s worth noting that IG bond spreads, particularly for higher-rated bonds, may fare relatively better in comparison. CreditSights said there is a possibility that IG spreads could demonstrate stronger performance amid a wider risk-off sentiment.

In the current IG market landscape, there’s an interesting phenomenon known as a flat yield curve. This means that the interest rates for short- and long-term IG bonds are pretty similar, like they’re on the same playing field. This situation opens up a potential opportunity for investors who want to shield themselves from volatility.

CreditSights said, given the current situation of flat yield curves and increased pressure on short-term spreads, it is advisable to be cautiously optimistic about shorter-term IG maturities compared to mid-term ones.

The credit research firm also suggested that investors seeking protection from debt ceiling volatility may find a barbell strategy beneficial. That means focusing on the two extreme ends of the maturities of IG bonds to strike a balance between higher yielding long-term bonds and the more flexible and liquid short-term bonds.

However, no two debt ceiling dramas are alike. The current economic landscape and market dynamics differ from those of 2011. It’s quite tricky to predict how the debt ceiling crisis will affect the market and the economy.

At the end of the day, you must still pay close attention to how the debt ceiling discussions go. You may also consult your investment advisor to craft a strategy that suits your needs.

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.

With the Bangko Sentral ng Pilipinas (BSP) pausing its series of interest rate hikes recently, households and businesses alike can breathe a sigh of relief. That’s because the cost of borrowing from banks are likely to stop becoming more expensive as well.

The property sector, in particular, was at the mercy of high interest rates as the combination of elevated inflation and expensive financing discouraged new leases and expansion projects. But with a new monetary policy easing cycle on the horizon, it may be time for investors to consider increasing exposure to the property sector in their portfolios through REITs.

A REIT, or Real Estate Investment Trust, is a stock corporation which owns and operates income-generating real estate, such as office buildings, industrial plants, shopping malls, and more. (See our previous article, Finding the right time to invest in REITs.)

Investors may purchase shares in these REITs, which differ from other shares of stock as REITs are mandated by Philippine law to distribute 90% of their earnings in the form of dividends. Imagine reaping the benefits of investing in real estate without actually having to acquire and manage a property.

While REITs are already well-entrenched in financial markets around the world, the Philippine Stock Exchange welcomed its very first one when Ayala Land-sponsored AREIT, Inc. had its initial public offering (IPO) on August 13, 2020. Since then, the number of REITs in the country has grown to eight, with SM Prime Holdings, Inc. planning to enter in the second half of 2023.

2022 saw significant economic recovery from the pandemic which helped revitalize earnings in the property sector. Office space occupancy was at around 80% as employees returned to their offices, while increased mobility and revenge spending drew shoppers to the malls.

REITs were able to ride and essentially hedge against high inflation through rent adjustments. Even as the Philippines’ Consumer Price Index (CPI) averaged 5.8% year-on-year in 2022, REITs still declared dividends that were above or close to that figure.

Chart 1. Philippine REITs 2022 Dividend Yields

REITs can be a hedge against inflation. (*322-day annualized dividend yield, **198-day annualized dividend yield)

The Philippines’ CPI has since come down to 6.6% in April 2023 from a high of 8.7% in January 2023. However, despite the downward trend in headline inflation, the core CPI, which excludes volatile oil and food prices, has remained stubbornly elevated at 7.9%.

This is primarily due to second-round effects – businesses increase the prices of their goods and services in anticipation of present and future cost increases. With consumption spending still strong, businesses will likely keep their prices high, which should also allow properties to continue charging higher rent for longer.

Chart 2. Philippine Headline Consumer Price Index vs. Core Consumer Price Index

While headline inflation has begun to ease since the beginning of the year, core inflation has not.

While policy interest rates are still elevated, we expect a new BSP easing cycle to begin with a 25-basis-point cut in December 2023. Lower interest rates will encourage greater spending by households and businesses.

For the property sector, this means building and acquiring more commercial real estate to meet the needs of expanding businesses, which can potentially broaden sources of rental income. The risk to this view is greater adoption of work-from-home (WFH) arrangements and the exit of Philippine Offshore Gaming Operators (POGOs).

But despite these risks, there will continue to be demand for office space as the economy normalizes and as businesses shift to more hybrid work arrangements which balance both work from home and the office.

An easing cycle and improving business conditions may also bring in renewed optimism in the equities, which can help pull REIT valuations up. Five of the eight REITs’ share prices are down year-to-date, while DDMPR and MREIT are relatively flat.

This could be an opportunity to enter the market and slowly ladder in excess funds. Only CREIT has shown double-digit growth, likely due to its portfolio concentrated on non-cyclical renewable energy producers.

Chart 3. Philippine REITs year-to-date returns as of 17 May 2023

In summary, we believe that there is an opportunity to invest in REITs, considering that borrowing costs may be headed lower in the near future and commercial real estate occupancy will improve as the economy further normalizes.

As mentioned, REITs can be an alternative source of regular cash flow because of its dividends. And because most REIT share prices are down year-to-date, this could be an opportunity to accumulate shares in REITs.

However, please be aware that REITs are still equity instruments. They are meant for investors with aggressive risk appetites and long-term investment horizons.

It is still advisable to consult investment professionals.

(If you are a Metrobank client, you may contact your relationship manager or investment specialist to learn more.)

EARL ANDREW “EA” AGUIRRE  is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

WHAT HAPPENED LAST WEEK

Better buying interest was seen in the peso government securities (GS) market early last week as players digested headlines of a potential pause in the Bangko Sentral ng Pilipinas’ (BSP) monetary tightening cycle amid slowing inflation seen in the past few months.

Risk appetite was further fueled by the strength of the 13-year auction for the reissuance of Fixed Rate Treasury Note (FXTN) 13-1, which was awarded at an average of 5.854% and a high of 5.874%. The 13-year bond also garnered strong interest in the secondary market as it traded by as much as 15 basis points (bps) lower from its auction average.

Other medium- to long-term peso GS followed suit as investors tried to pick up long-dated bonds. The 20-year benchmark peso yield was taken down to the 5.80% level as there was a lack of bond supply in this tenor bucket.

The BSP was then seen keeping the key policy rate unchanged, or just in-line with expectations for the much-awaited Monetary Board meeting, and lowered the inflation forecast for the year to 5.5% vs. the previous 6.0%.

To end the week, the peso GS market finally tracked the move higher in US Treasur

Concerns about the commercial real estate (CRE) sector moved to the forefront following the fall of Silicon Valley Bank (SVB) and the mini banking crisis that ensued thereafter.

Why? Well, the work-from-home arrangements that led to high vacancies raised questions about the future of US office space. One of the scarier numbers being thrown around is the amount of CRE debt that needs to be refinanced over the immediate term, with the most common refrain citing USD 1.5 trillion maturing over the next three years.

Smaller US banks remain meaningful players in commercial real estate lending. Banks with less than USD 5 billion in assets still comprise about 30% of holdings, with another 21% held by banks with USD 5-25 billion in assets.

Are CRE concerns valid?

Despite the seemingly dire numbers, we believe the CRE concerns are overblown.

As our research partner, CreditSights, has reported, banks do not normally participate in fixed-rate lending for CRE, as around 81% of CRE loans under the coverage of CreditSights have variable interest rates. This lessens the risk of unexpected price adjustments when the loan matures.

Moreover, longer-term trends indicate that CRE loan exposures as a percentage of the banking system’s tangible equity are still at multi-decade lows, much lower than what we saw before the economic downturns in the late 1980s and mid-2000s, indicating that banks are not taking on too much risk in the CRE sector.

Ratios to take note of

The ratio of outstanding commercial mortgages to GDP can be a proxy for CRE demand. The historical behavior of this measure shows that during financial crises, the ratio considerably deviated from its long-term trend.

What is interesting is that there has not been a surge in debt levels that would lead to a significant deviation for more than 10 years. The brief spike in 2020 stemmed from the COVID-19 pandemic, but generally, there has not been a persistent trend of heightened borrowing.

When comparing bank lending for CRE to the Commercial Property Price Index, which reflects asset valuations, we observe that valuations have outpaced loan growth since the financial crisis. This suggests that there is a more careful and balanced approach to leverage and loan-to-value (LTV) ratios in the CRE market.

Better prospects this time around

Banks have substantially scaled back their lending for construction and development projects since the 2008 crisis. These loans have not significantly increased since then. Note that these development loans had high default rates compared to other types of CRE loans and were a major driver behind the losses that banks sustained during the financial crisis.

While construction lending has been relatively flat since 2017, stabilized CRE lending, or loans for CRE properties that are already operating and generating consistent income, has been gradually growing, slightly exceeding the growth of total bank lending.

The sector that attained significant expansion is multifamily properties, such as apartments. Note that multifamily lending is reinforced by strong demand, particularly because people need shelter and these multifamily properties are a necessity, combined with other factors such as affordability.

Dismantling concerns

Banks’ exposure to office properties is relatively minor compared to their total loan portfolios. Banks also have strong reserve levels, and they hold senior positions in the capital structures of these properties, which diminishes possible risks.

It is important to note that larger national banks usually have a bigger share of lending in industrial and office assets, while smaller banks play a more prominent role in lending in the retail and hotel markets.

Hence, recent concerns about office assets should not be taken to reflect the overall health of the broader CRE market.

Moreover, banks only have a limited amount of non-agency Commercial Mortgage-backed Securities, or CMBS securities, which are higher-risk securities with no government backing, in their holdings. This further reduces their exposure to potential risks.

Although smaller US banks have significant exposure to CRE lending, they also tend to be more biased toward lower-risk owner-occupied CRE loans, making up 40-50% of holdings for banks with assets of less than USD 5 billion.

Recent concerns about the CRE sector seem exaggerated, as there has been a significant decrease in banks’ exposure to higher-risk construction and development loans, a relatively low level of leverage in the CRE market, and other changes in the banks’ overall CRE lending approach.

The total CRE market has been more stable compared to past periods of financial crises, indicating that banks are in a much better position now to handle potential risks.

Challenges and opportunities

While we believe the CRE risk is not systemic, challenges remain for the smallest banks amid tight lending conditions and high interest rates. Despite the disconnect with market pricing, the US Federal Reserve has explicitly stated it does not expect policy rate cuts this year to deal with recessionary risks, namely, the looming credit crunch, the debt ceiling standoff, and the climate hazard from El Niño.

Thus, in a risk-off environment, there are opportunities in the fixed-income market as we think the Fed has reached the peak of its tightening cycle. Capital gains can be realized when the real pivot, i.e., policy rate cut, takes place.

The perceived economic uncertainty warrants a preference for high-quality assets like government securities and investment grade (IG) credits over equities. A new easing cycle on the horizon, granted that inflationary pressures ease, could then present opportunities for the equities market.

For now, it is prudent to be conservative and switch to higher-yielding assets as inflation remains elevated, and wait until the US Fed and the Bangko Sentral ng Pilipinas see a compelling reason to cut interest rates.

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.

GERALDINE WAMBANGCO is a Financial Markets Analyst at the Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides research and investment insights to high-net-worth clients. She is also a recent graduate of the bank’s Financial Markets Sector Training Program (FMSTP). She holds a Master’s in Industrial Economics (cum laude) from the University of Asia and the Pacific (UA&P). She takes a liking to history, astronomy, and Korean pop music.

Just as the country is nearing the end of summer days and saying hello to cooler months, dry spells and droughts are seen looming in some areas of the Philippines due to El Niño.

According to PAGASA, recent conditions and model forecasts indicate an 80% probability of an El Niño occurring within June to August. This is seen to persist until the first quarter of 2024.

El Niño is caused by the warming of the sea surface temperature in the Pacific that can affect air and sea currents. This then results in reduced rainfall which could lead to droughts and stronger typhoons later.

Why should we be concerned?

While not a new phenomenon in the Philippines, the past El Niños have resulted in dips in agricultural production, whether weak or strong.

The last El Niño to hit the Philippines was the one in 2015-2016, which lasted for approximately 18 months. According to the Food and Agriculture Organization (FAO), 1.48 million metric tons of crops, including rice, corn, cassava, banana, and rubber were lost, resulting in a total of USD 325 million worth of damage and production losses. This also affected 413,456 farming households which needed support to start anew in the next cropping season.

Hot sea water temperatures in the 2015-2016 El Niño also led to a decline in fisheries production, particularly in the aquaculture sector. Mindanao also had power supply shortages because the operations of hydroelectric dams were hampered by low water levels.

Rice and corn production typically suffers during El Niño episodes. Source: PSA, World Bank Report

El Niño typically occurs every two to seven years, with La Niña and neutral conditions in between. Based on records, the world’s hottest year so far was 2016, and there is a high possibility of reaching new record high temperatures in 2023, according to climate analysts.

What now?

The looming El Niño will likely hit corn and rice’s main cropping seasons and subsequent harvest seasons.

El Niño, which is expected to be felt in the country from July 2023 to March 2024, could hit corn and rice production at their critical months. Source: USDA

While importing might be the easy solution, major rice producing countries are most likely to face similar challenges. For instance, Thailand, the world’s second-biggest rice exporter, is considering reducing its cropping season to just one instead of the usual two seasons this year due to the feared impacts of El Niño.

Food inflation, while moderating, remains elevated, and a shortfall in rice or agricultural production in general might prompt a new round of price increases.

Strategies have been laid down to mitigate the impacts of the looming El Niño with high priority given to water supply infrastructure and early water and power conservation efforts. This, it is hoped, could alleviate production dips, and help the country endure the heat.

INA JUDITH CALABIO is a Research & Business Analytics Officer at Metrobank in charge of the bank’s research on industries. She loves OPM and you’ll occasionally find her at the front row at the gigs of her favorite bands.

The Intergovernmental Panel on Climate Change (IPCC) Six Assessment Report does not give a pretty picture of where humanity is going in its climate change actions.

The report says the world is on its way to irreversible global warming. This, in turn, is causing many weather and climate extremes, which are felt as powerful storms, heavy rains, and severe heat waves in different parts of the world.

The report stressed that governments have a key role to play. The costs, however, are steep, and agreeing on the same policies and technology standards is tricky.

If governments are unable to meet halfway to combat climate change, the hope is still for the private sector to step up and even lead in pushing for climate change adaptation investments.

Capital markets as key driver

Speaking at the recent Wealth Matters webinar held by Metrobank, Fred Wood, director and product strategist of Blackrock investments, said that it is capital markets that should drive change towards climate investments, especially in energy transition.

Wood said that climate investments have been steadily increasing over the last few years, primarily as a reaction to the effects of weather extremes on the overall supply chain. Energy is a major sector that needs to transition.

A continuous and reliable source of electricity is what fuels key industries worldwide, from manufacturing to logistics. Yet it is one of the biggest sources of carbon dioxide, which makes up a large part of the greenhouse gases that cause global warming.

Costly transition

“Energy transition is going to involve an enormous amount of investment, material, and cause a lot of disruptions in many industries. We’re still making more carbon each year, and the challenge we face is quite considerable. But there are lots of opportunities,” Wood said.

According to Wood, sustainable energy sources, such as wind and solar, are gradually becoming more appealing as investment opportunities. The prices of wind turbines and solar panels are coming down, enabling mass production of such equipment and its subsequent adoption. Companies that are involved in the manufacturing of wind and solar-based energy facilities are most likely to achieve more growth as institutional investors favor them over fossil fuel-based industries.

And because of growing public sentiment and growing government concerns about energy security, policies in many economies are making it easier for renewable energy projects to get their permits to start building. Sometimes it’s faster than even getting nuclear power plants started.

Fast deployment

“It takes 10 to 15 years to plan and start building a nuclear power plant in Europe. Solar farms only take months, permitting issues notwithstanding,” he said.

Answering the question on political and regulatory disagreements over what to do to curb pollution by two of the world’s biggest sources of greenhouse gases, the US and China, Wood said that companies coming from these two superpower economies are gradually adapting by including sustainability sections into their corporate reports.

For Wood, it makes good and sound business sense to add sustainability reports that mark up the value of companies’ efforts.

“I think regardless of what the regulatory environment is in these companies, they’re all changing. It’s the investors who are making it happen and the companies are being rewarded,” Wood said.

Need to move fast

Indeed, climate investments are at a critical juncture, as demand is also being driven by the ongoing conflict between Ukraine and Russia. The latter’s oil pipelines were turned off, which has also forced some European countries that were once dependent on Russian oil to look for other sources. The effect is also that these countries are actively investing to transition to renewables, as forecasted by research firm McKinsey.

But there is still a need to further mobilize more private investments. In an article by the World Bank, of the estimated USD 30 billion spent on climate adaptation measures as of 2018, only USD 500 million — roughly 1.6% — came from private sector investments.

It is hoped that with the effects of climate change already pushing economies around the world to adapt quickly, the decision to fast-track climate investments will be expedited before it is too late.

ALEXANDER VILLAFANIA is a writer for Metrobank’s Wealth Insights. For almost 20 years, he authored stories on science, technology, and education as a journalist for several local news organizations. He has since transitioned to writing more about financial literacy, believing that helping people develop a healthy relationship with money is key to enabling positive socio-economic and environmental change.

WHAT HAPPENED LAST WEEK

The Philippine Stock Exchange index (PSEi) rose by 1.31% (+86.40 points) week-on-week to close at 6,664.55. Investor sentiment improved following the Bangko Sentral ng Pilipinas’ (BSP) decision to pause rate hikes during its recent monetary board meeting, keeping interest rates steady at 6.25%.

The BSP also lowered its 2023 inflation forecast to 5.5% (from 6.0%). Moreover, BSP Governor Felipe Medalla signaled that the central bank would likely keep interest rates unchanged in the succeeding policy meetings. The positive news around the US debt ceiling negotiations also spilled over to the local market, which pulled the index higher.

Top index performers were GT Capital (GTCAP) (+8.4%), PLDT (TEL) (+4.7%), and Jollibee Foods Corp. (JFC) (+4.5%), while index laggards were Puregold (PGOLD) (-3.9%), LT Group Inc. (LTG) (-3.6%), and Universal Robina Corporation (URC) (-3.3%). The index breadth was positive with 24 gainers versus six losers. The average daily turnover value was PHP 4.1 billion. Foreigners were net buyers by PHP 230.8 million.

WHAT TO EXPECT THIS WEEK

We expect the market to trade sideways with a slight downward bias as investors await further news on the US debt ceiling negotiation and other key data releases. Local fuel prices are also expected to increase by about PHP 0.50 to PHP 0.70 per liter of diesel and PHP 0.70 to PHP 0.90 per liter of gasoline.

PSEi TECHNICAL ANALYSIS AND TRADNG PLAN

Resistance: 6,800

Support: 6,600 / 6,400

The PSEi rebounded last week and is back above the 6,600 level. It is worth taking note, though, that the 100-day moving average (MA) (~6,687) again acted as an immediate resistance level last week. We believe that only once the PSEi breaks above the 100-day MA or 6,800 will there be a reversal of the market’s short-term downtrend.

Gradually accumulate once the PSEi trades back above 6,800.

STOCK CALLS FOR THE WEEK

Ayala Corp. (AC) — BUY ON BREAKOUT

AC is showing signs of bullish recovery after the stock broke above the 50-day moving average (MA) price earlier this month (May 2023). AC’s share price has rallied by as much 9.7% month-to-date after the company’s reported income came in at PHP 10.2 billion (+31% year-on-year), driven by the strong growth from its banking and property segments.

Excluding the one-off items, AC’s core net income came in at PHP 9.4 billion (+61% y-o-y), in line with consensus estimates. AC’s share price also benefitted after the company had the top weight increase in the MSCI PH Standard Index Review last May 12, 2023 (effective June 1, 2023). Meanwhile, the technical indicator MACD confirms the bullish momentum. We think that a rally will occur should AC break above its 100-day and 200-day MAs (~PHP 680) as well as the PHP 710.00 resistance level.

Accumulating once AC breaks above PHP 710.00 is advisable. Set stop limit orders below PHP 653.00 and take profits at around PHP 817.00/PHP 840.00.

Megaworld Corp. (MEG) — BUY

The company’s strong 1st quarter 2023 earnings as well as the Bangko Sentral ng Pilipinas’ (BSP) pause in rate hike drove MEG’s share price to rise by as much as 5.5% last week, which resulted in the formation of a double bottom, an intermediate-term bullish pattern.

According to Technical Insight, our automated chart pattern recognition program, the measured price target after MEG broke out of its double bottom pattern is PHP 2.21 to PHP 2.25. As for management guidance, MEG plans to increase its project launches by 33% y-o-y to PHP 60 billion in 2023. The company aims to focus on its residential segment, projecting reservation sales of around PHP 130 billion for the year, compared to PHP 119 billion in pre-sales in the previous year.

In addition, MEG has allocated PHP 55 billion in capex, a nearly 20% increase from 2022’s budget. Accumulating MEG at the current levels is advisable. Set stop Limit order/s below PHP 1.92. Take profit at around PHP 2.30/PHP 2.40

Petron Corp. (PCOR) — BUY ON BREAKOUT

PCOR reported 1st quarter 2023 net income of PHP 3.4 billion (-6% y-o-y) amid the 16% y-o-y decline in crude prices and higher financing cost, ameliorated by the mark-to-market valuation of its commodity hedges.

PCOR registered fuel demand and sold consolidated volumes of 28.6 million barrels (+11% y-o-y). The lower net income has resulted in PCOR retesting its support level around PHP 3.25. PCOR is mostly trading between PHP 3.25 to PHP 3.70. With the stock coming from a short-term rally in March 2023, it is likely that the counter will resume its pace once PCOR breaks above PHP 3.70.

On the other hand, if PCOR breaks below PHP 3.25, the stock can retest the PHP 3.00 level. As for company guidance, despite the external challenges, PCOR remains confident in achieving full financial recovery this year driven by the consistent rise in fuel demand. Accumulating once PCOR breaks above PHP 3.70 is advisable. Set cut loss below PHP 3.40. Take profit at around PHP 4.25/PHP 4.50.

KEY DATA RELEASES

Tuesday, May 23, 2023
– US S&P Manufacturing Purchasing Manager’s Index (PMI) for May 2023 (consensus estimate: 50.0; actual for April 2023: 50.2)

Thursday, May 25, 2023
– US Initial Jobless Claims as of May 20, 2023
– PH Budget Balance for April 2023 (March 2023: -210.3 billion)

The Bangko ng Sentral ng Pilipinas (BSP) kept the policy rate unchanged at 6.25%, after around a year of rate increases. This was attributed to easing inflation, as the inflation print slowed to 6.6% in April from 7.6% in March.

The BSP likewise revised its full-year average inflation forecast downward for both 2023 and 2024, as it estimates inflation to slow further and reach the target band of 2-4% by yearend.

We project the RRP rate to stay at the 6.25% level for the rest of the year, with a potential cut by year-end to 6.0% due to the projected downward trajectory of inflation.

Please see our report here for more information on meeting updates and our outlook.

The Bangko Sentral ng Pilipinas (BSP) Monetary Board is set to determine anew the policy rate direction for the Philippines tomorrow, May 18. Given the satisfactory March and April inflation outturn which BSP earlier noted would be the basis for tomorrow’s policy rate decision, the latest deceleration makes a stronger case for a pause in the policy rate hikes. This is consistent with BSP’s signals in the past weeks.

See our full report for more details.

WHAT HAPPENED LAST WEEK

It was a volatile week for the peso government securities (GS) market as opportunistic buyers were easily met by profit-takers.

Heading into the 10-year auction on Tuesday, better buying interest was seen as the 10-year bond was taken down to as low as 5.685% but closed the morning at 5.70%. The Bureau of the Treasury (BTr) then fully awarded the re-issuance of Fixed Rate Treasury Note (FXTN) 10-69 at an average of 5.732% and a high of 5.76%, or at the lower end of market indication. Despite the lower than anticipated auction results, profit-takers were quick to emerge as yields of medium to long-term peso GS rose by 5 basis points (bps).

The better-than-expected US April inflation and local first quarter Gross Domestic Product (GDP) data allowed the market to trade within range the rest of the week. Over-all, yields of medium- to long-term peso GS traded sideways for the week with an upward bias of 2.5 bps.

Market Levels (week-on-week)