Foreign buying seen steady despite Fed
THE PHILIPPINE stock market should remain resilient even if the United States Federal Reserve were to lift interest rates further this week, as widely expected, drawing strength from sustained foreign fund inflows on the House of Representatives’ approval of a tax reform package and economic growth prospects.
A barometer of investor confidence, the Philippine Stock Exchange index (PSEi) touched the 8,000 level twice last week before settling at 7,990.24 on Friday, helping the benchmark index stretch its annual gain to 16.8%.
The stellar performance of local equities was fueled by a surge in foreign inflows to the tune of P6.79 billion year to date, according to data from the bourse. This was a turnaround from the P17.6-billion net selling position in March, Philstocks Financial, Inc. Senior Research Analyst Justino B. Calaycay, Jr. said.
Sun Life of Canada Philippines, Inc. upgraded its PSEi forecast for the year to 7,800-8,200 — from 7,400-7,800 earlier — citing the influx of foreign funds due to a shift in buying from developed to emerging markets despite anticipation of a US interest rate increase when the Federal Open Market Committee meets on June 13-14.
That will follow the quarter-of-a- point hikes in December 2015 and 2016, as well as last March, after close to a decade of near-zero rates that helped nurse the US economy back to health from the December 2007-June 2009 “Great Recession.”
The Fed signaled as late as March that two more rate increases may be in the cards this year, though weak economic data since then — with job growth falling short of expectations and core inflation still below a two-percent target — has tempered expectations of any hike after this week.
“The market is now expecting US rates not to move up as fast as originally expected. This has fueled the equity rally. Here in the Philippines, we have been receiving constant foreign buying,” Sun Life Chief Investment Officer Michael Gerard D. Enriquez said.
A US rate hike this week may initially temper foreign buying, but that will cause only a “mild correction,” said Cristina S. Ulang, First Metro Investment Corp. assistant vice- president and Research head.
“( President Rodrigo R.) Duterte’s tax measure becoming law very soon heralds a credit rating upgrade. It makes for a highly durable positive sentiment that we’ve seen unshaken by the Resorts World attack and martial law in Mindanao,” Ms. Ulang said.
Lawmakers approved House Bill No. 5636, or the proposed Tax Reform for Acceleration and Inclusion, on May 31 before they adjourned the first regular session, taking the proposal a step
closer to becoming a law. The ball will be in the Senate’s court when Congress reconvenes on July 24 for the second regular session.
Last week, Moody’s Investor Service described the approval of the first of up to five tax reform packages as “credit- positive” for the Philippines since it will provide a new revenue stream and this proves the government’s capability to put planned reforms in place despite nagging political controversies. The Philippines currently holds a “Baa2” rating with a “stable” outlook from Moody’s, a notch above minimum investment grade.
Fitch Ratings — which on March 29 affirmed the Philippines’ “BBB-” rating, the lowest investment- grade score, with positive outlook, indicating the possibility of an upgrade within two years — followed closely, saying the House approval addressed revenue weakness that has smudged the Philippines’ otherwise bright fiscal picture and “demonstrates the administration’s commitment to broader tax reforms that have the potential to improve fiscal stability and support an ambitious public investment program.”
Norman C. del Carmen, head of investments at China Banking Corp.’s Trading and Investments unit, said the liquidity- driven rally can be sustained by local catalysts like progress of the tax reform package through the Senate and relatively strong economic growth. “There are cases that the government will fail on the execution part. Those are the risks, but so far — relative to peers — we have one of the best growth.”