General Market Review
GENERAL MARKET REVIEW
Philippine Gross Domestic Product (GDP) growth came in at 6.1% for 2014, lower than the 7.2% growth posted in 2013. In spite of the decline, Philippine growth ranked second in Asia, behind China (7.4% growth) and ahead of Malaysia (6.0%), Vietnam (6.0%), and Indonesia (5.0%). Sources of strength continue to be domestic consumption, services, exports, and manufacturing, with a moderate improvement seen in agriculture. Government spending was weaker, due in part to issues related to the Disbursement Acceleration Program and its trickle-down effect on other government agencies. Investment in inventories was also weak, due mainly to issues on port congestion, which is gradually being alleviated.
Gross International Reserves remain at a high level (USD80 billion) as OFW remittances continue to be robust (USD24.3 billion, up 5.8% from 2013). Inflation was higher at 4.2% during the year compared to 2.9% in 2013 on higher food and power prices (the former largely caused by logistics problems stemming from the Manila truck ban), although still within the Bangko Sentral ng Pilipinas (BSP) target range of 3-5%. Higher inflation expectations prompted the BSP to raise overnight rates by 0.50% to 4.50% and reserve requirement rates were also raised by 2% to 20%. The Philippine Peso weakened marginally, closing the year at PHP44.72 from PHP44.40 during the previous year. Sustained improvements in economic management continue to be recognized by the international investment community – Standard & Poor’s raised its Philippine credit rating by one notch to BBB in May, with Moody’s Investor Service upgrading its rating in similar fashion to Baa2 in December. Both ratings are now two notches above investment grade. These actions firmly established the country as an investment grade credit.
Looking forward, the outlook for the economy continues to be positive in 2015. Consensus GDP growth forecasts are at 6.3%, with the official government target set at a more aggressive 7-8%. Inflation according to the BSP should range between 2-4%, lower compared to 2014 due in part to lower oil prices. Benign inflation should anchor interest rates at relatively low levels, which should bode well for the business environment.
Overall, the usual areas of economic strength seen in recent years are expected to continue to perform, with a meaningful increase in government spending a potential catalyst for outperformance in the year ahead.
MARKET
Equities Market
The local stock market benchmark Philippine Stock Exchange Index clinched its sixth straight year of gains by closing 2014 at 7,231.23% above end-2013’s 5,889. Over the said six years, the market has averaged an annual gain of 25% per year. 2014 was also the sixth straight year of net foreign buying: foreigners bought about USD1.3 billion worth of local stocks – an 85% increase year-on-year. During the year, Meralco and Emperador Inc. replaced Manila Water Company, Inc. and Philex Mining in the benchmark Index.
For 2015, local corporate earnings growth is expected to return to double digit territory as the market attempts to make it seven straight years in positive territory.
Bond Market
Local bond investors entered 2014 on a cautious note on the back of higher inflation expectations, which raised the possibility of interest rate hikes from BSP. Given this backdrop, market players pushed up bond yields during the early part of the year, with the 10-year Fixed Rate Treasury Notes (FXTN), yield rising from 3.6% at end-2013 to 4.4% in February and the 20-year FXTN yield up from 4.6% to 5.4% during the same period. However, actual inflation numbers reported were consistently lower than market expectations, thereby capping the rise in yields.
The BSP’s policy actions tempered inflation expectations, provided confidence to investors, and lent stability to the bond market as the year progressed. Credit rating upgrades also sustained demand for Philippine assets. On the supply side, the Bureau of Treasury executed a bond exchange in August where a total of PHP140 billion in new 10-year FXTNs were issued. The new bonds were well received by the market and fetched a coupon of 4.125%. This was the first bond exchange conducted since 2011.
Inflation began to decline during the latter part of the year, due in part to the rapid decline in oil prices. This, together with robust market liquidity, a still low global interest rate environment, and sound local economic fundamentals caused bond yields to trend lower as the year drew to a close. The 10-year and 20-year FXTN finally settled at 3.9% and 4.8%, respectively, at year-end. Investors are maintaining a cautious stance going into 2015, due mainly to the prospect of higher interest rates in the United States which, if it materializes, may exert upward pressure on local bond yields. However, conditions remain broadly positive on the local front with inflation expected to be lower compared to 2014, and the BSP expected to maintain policy rates at current levels for the better part of the year.
GLOBAL MARKETS
The high level of volatility experienced by the global markets in 2013 resulted in a general sentiment of uncertainty among investors going into 2014. The so-called taper tantrum caused U.S. interest rates to rise to multi-year highs during the second half of 2013, which triggered a broad sell-off in equity and bond markets across the globe. With investors anticipating a continued rise in U.S. interest rates, forecasts were relatively downbeat for 2014. However, economic data flowing out of the U.S. was not encouraging – weak growth, low inflation, and high unemployment was prevalent during IH2014. Economic conditions therefore diminished prospects of the Federal Reserve raising benchmark interest rates sooner rather than later. Yields on U.S. Treasury bonds subsequently began a steady downward trend that progressed throughout the year, which fueled a rally in asset prices worldwide. Also, the Federal Reserve embarked on a process to gradually end its Quantitative Easing program, with the final step taking place in October.
Economic activity in the Eurozone continued to be lackluster in 2014, seeing on material improvement from the previous year. An emerging concern was the threat of deflation in the continent. In response, the European Central Bank lowered policy interest rates during the second quarter, in an effort to stimulate the economy. This move, however, did not have a meaningful effect on business activity in the region and sparked discussion calling for more aggressive stimulus measures.
Asia continued to be the driver of global growth during the year. Average GDP growth in the region was a robust 6.3%. Inflation was fairly low, so was unemployment. Government balance sheets likewise remained healthy. Concerns emerged regarding a protracted slowdown in the Chinese economy, but the government responded by initiating stimulus measures in the form of higher public spending and lower policy interest rates.
A major development in 2014 was the steep decline in world oil prices, due mainly to increasingly supply out of the U.S., the reluctance of the Organization of Petroleum Exporting Countries (OPEC) bloc to reduce production levels, and prospects of weaker demand globally.
Prospects remain arguably mixed going into 2015. U.S. growth is expected to be moderate, but improvements have been observed in the labor markets. The Eurozone continues to struggle, with markets expecting elevated action from the European Central Bank. Meanwhile, Asia is expected to remain a source of strength. Sustained low oil prices will keep inflation manageable, allowing central banks to maintain monetary policy that is supportive of growth.