After reaching a low of 6,164.89 on May 24, the Philippine Stock Exchange Index (PSEi) has risen 12.7 percent to close at 6,950.51 last Friday.
While fund flows have been largely responsible for the market’s strong development over the past few weeks, there are also fundamental reasons to be more bullish. These include the following:
Declining number of COVID-19 cases
While Visayas, Mindanao and parts of Luzon are experiencing a large number of daily new COVID-19 cases, the number of cases in the National Capital Region (NCR), which was part of the epicenter of the second wave of infections in March, has fallen to an average at 700 on June 15 to June 21 from a peak of 5,535 on March 29 to April 4. Even with the high number of cases in other parts of the country, the seven-day average number of daily new cases in the Philippines has dropped to 5,546 from a high of 10,845 on April 15th.
Because of this, the government recently opened NCR Plus – Metro Manila, Bulacan, Cavite, Laguna and Rizal. The reopening of NCR plus should help offset the tightening of mobility restrictions in other parts of the country, as NCR accounts for 31.9 percent of gross domestic product (GDP), while Cavite, Laguna and Rizal are part of Calabarzon, which accounts for approx. 14.5 percent of GDP.
The rollout of vaccination is gaining momentum
Since the vaccination program started in March, 6.7 million people have received their first dose, while 2.2 million are now fully vaccinated.
More people should be vaccinated soon as the supply of vaccines increases. As of last week, the Philippines still had a supply of 7.3 million doses. The vaccination rate is now averaging around 223,000 doses per day. Although this is still too slow, the government could reach its goal of full vaccination of 70 million Filipinos by January next year if it succeeds in increasing the rate of vaccination to 500,000 doses a day in the third quarter and 740,000 doses a day in the fourth quarter.
Even if the government does not achieve flock immunity for the whole country early next year, its strategy of prioritizing the NCR plus 8 areas that are the most populous and with the highest density should allow it to control the number of infections better and reopen the economy faster, as these areas have the greatest risk of COVID-19 transmission. The NCR Plus 8 areas consist of NCR, Metro Cebu, Metro Davao, Bulacan, Batangas, Cavite, Laguna, Pampanga and Rizal.
Potential passage of Bayanihan 3
Last June 1, the House of Representatives passed Bay4040 billion P401 billion to emerge as one or the Bayanihan 3 bill. Under this, every Filipino will receive P2,000 in financial support for a total of P216 billion, while others affected by the pandemic will receive more.
While it is still uncertain whether the bill will be enacted into law, additional subsidies will help increase consumer spending, which is hurt by high levels of unemployment and inflation. Consumer spending fell 4.8 percent in the first quarter of the year.
Inflation was already peaking
After rising to 4.7 per cent in February, inflation remained flat at 4.5 per cent from March to May as food inflation fell steadily from 6.7 per cent in February to 4.6 per cent in May. Food inflation fell as prices of rice, fruit and vegetables fell while meat prices were flat.
Combined with the fall in U.S. bond yields, the peak of domestic inflation helped push the Philippine 10-year bond yield from a high of 4.5 percent in March to 3.9 percent at the moment. Lower interest rates should help increase the attractiveness of the stock when investors are looking for higher returns.
Restoring company earnings on track
Income from listed companies increased in the first quarter of 2021 by approx. 15 percent, with 67 percent of the companies we monitor reporting higher earnings and only a handful of reporting losses.
Admittedly, only a few companies reported higher revenue on an annual basis, as mobility restrictions only began in mid-March last year, making the first quarter of last year a high base. Those reporting higher incomes either belonged to resilient companies or had international operations.
However, even with weaker revenues, corporate earnings still improved due to various reasons, including successful cost-saving measures and lower tax rate as a result of the review of corporate recovery legislation and corporate tax incentives.
Compared to expectations, several companies surprised positively, with the number of companies performing above expectations reaching 39.3 percent. This is more than the 32.1 percent that underperformed estimates for the first quarter.
Although the Philippine market was able to correct in the short term as the US Fed recently announced plans to start raising interest rates and potentially reducing monthly bond purchases, the PSEi is likely to remain above its lowest level of 6,164.89 given the improved outlook locally economy. Any correction caused by the normalization of the Fed’s monetary policy should only be temporary, as the effect of a strengthening economy on corporate earnings more than offsets the increase in financing costs. INQ
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