Not expecting a repeat of 2013 taper tantrum in PH stock market

The US 10-year bond rate has increased sharply from 0.9 percent as of end December to 1.6 percent currently, causing jitters in global equity markets including the Philippines.

Interest rates increased sharply due to the improving outlook of the US economy and the growing likelihood that the Biden administration will successfully pass a $1.9-trillion fiscal stimulus program. The said factors are expected to push up inflation and prompt the US Federal Reserve to taper its $120-billion monthly bond-buying program or raise the benchmark Federal fund rate which is close to zero.

Investors are rightfully worried since the Fed’s aggressive monetary policy is largely responsible for the stock market’s strong performance since March last year despite the pandemic.

There are also worries that we could see a repeat of the 2013 taper tantrum. Recall that in 2013, the US 10-year bond rate jumped from 1.6 percent to 3 percent, triggered by an announcement from the Fed that it would reduce the pace or taper the size of its monthly bond purchases. This caused the PSE (Philippine Stock Exchange) index to drop by 22 percent and the peso to depreciate by 9.5 percent in a span of three months from May to August of 2013.

Nevertheless, even with the rising US 10-year bond rate, I don’t think we will see a repeat of the taper tantrum.

Even with its improving outlook, the US economy is still far from reaching full employment. As of February, the US unemployment rate was at 6.2 percent, still 2.2 percentage points above its prepandemic level of 4.4 percent. Moreover, given the high unemployment rate and numerous businesses suffering from excess capacity, pricing power is weak, making it difficult for inflation to stay at the Fed’s target rate of 2 percent. As such, the Fed said it had no plan to raise interest rates or cut back on its bond-buying program anytime soon.

Another reason why I don’t expect to see a sharp decline of the Philippine market is the absence of foreign buying. After the global financial crisis in 2008, foreign investors were very bullish on the Philippine stock market and bought a total of P283 billion worth of stocks from 2009 to April of 2013. Not surprisingly, when the US 10year bond rate shot up in May 2013, foreign investors had a lot of stocks to sell. In contrast, foreign investors have been consistent net sellers of Philippine stocks since May of 2019 and are now heavily underweight in the Philippines. Therefore, even if interest rates shoot up, I don’t think they have much left to sell.

One factor though that could cause markets to go down is the expensive valuation of US stocks. With interest rates going up, US stocks could go down and this could trigger a sell-off in other markets around the world, including the Philippines.

Nevertheless, any sell-off in Philippine stocks that would materialize because of this is not expected to be sustainable, especially since Philippine stocks are very cheap. In fact, despite underperforming other countries in Asia, the Philippine economy is finally starting to show signs of a stronger recovery. As such, any sell-off triggered by concerns that there would be a repeat of the 2013 taper tantrum should be good opportunity to buy Philippine stocks at an even cheaper price.