Fund Manager’s Corner

NOTES FROM THE FUND MANAGER – April 26, 2022

Fixed Income update

U.S. Core Personal Consumption Expenditures (PCE) price index increased 5.2%, adding pressure on the Fed to hike interest rates. The Fed is holding its policy meeting on May 3-4 and is expected to raise rates by 50 basis points which would bring the Fed funds target rate range between 0.75% to 1%. The Fed is also expected to announce the start of a program to wind down its roughly $9 trillion balance sheet by $95 billion a month, starting in June. Week-on-week, the yield on the 10-year U.S. Treasury rose by 7 basis points, closing at 2.89 on May 2.

In the local space, March Balance of Payments (BOP) swung to a $754Mn surplus in due to foreign currency deposits from the National Government and BSP’s investments abroad. For 2022, the BSP expects the BOP position to stand at a $4.3Bn deficit, equivalent to 1% of GDP. Week-on-week, local yields rose across the board after BSP Gov. Dioknio was quoted saying that they may consider a policy rate hike at the June Monetary Board meeting. On average, 1–3-year bonds rose by about 5 basis points, 4–7-year bonds rose by about 17 basis points, and 8–10-year bonds rose by about 14 basis points. For this week, the yields are expected to sustain their upward trend on the back of a potential 50 basis point hike by the Fed on its upcoming May policy meeting. For our strategy, we will keep to the sidelines this week by not participating in the 10-year FXTN auction (re-issuance) today. We expect the BTr to award bids again at rates higher than secondary market yields.In the local space, the Philippines’ budget deficit shrank by 1.97% to Php187.7bn in March as revenue collection jumped 35.96% to Php293.9bn following the gradual economic reopening while government spending grew 18.15% to Php481.55bn due to higher budgetary support for GOCCs. Week-on-week, local yields fell across the board after BSP Gov. Dioknio said in an interview that the central bank may consider hiking interest rates at its June 23 meeting. On average, 1–3-year bonds fell by about 7 basis points, 4–7-year bonds fell by about 15 basis points, and 8–10-year bonds fell by about 14 basis points. For this week, the yields are expected to move higher due to expectations of elevated inflation in April and a 50 basis point rate hike by the Fed at its May policy meeting. For our strategy, we will keep to the sidelines this week by not participating in the 3-year FXTN auction today. As in the past, the BTr awarded the re-issued FXTN at rates higher than the secondary market yields.In the local space, March Balance of Payments (BOP) swung to a $754Mn surplus in due to foreign currency deposits from the National Government and BSP’s investments abroad. For 2022, the BSP expects the BOP position to stand at a $4.3Bn deficit, equivalent to 1% of GDP. Week-on-week, local yields rose across the board after BSP Gov. Dioknio was quoted saying that they may consider a policy rate hike at the June Monetary Board meeting. On average, 1–3-year bonds rose by about 5 basis points, 4–7-year bonds rose by about 17 basis points, and 8–10-year bonds rose by about 14 basis points. For this week, the yields are expected to sustain their upward trend on the back of a potential 50 basis point hike by the Fed on its upcoming May policy meeting. For our strategy, we will keep to the sidelines this week by not participating in the 10-year FXTN auction (re-issuance) today. We expect the BTr to award bids again at rates higher than secondary market yields.

USDPHP rose by 4 cents week-on-week, closing at 52.38 as of May 2.

Equities update

The Philippine Stock Exchange (PSEi) closed at 6,721.05 (’22 est. PE of 15.47x) on May 3, down by 3.71% week-on-week (-5.64% YTD) as concerns over rising inflation and higher interest rates continued to dampen market sentiment. Week-on-week, MONDE (+5.18%) was the top gainer on bargain hunting, while AEV (-10.90%) was the worst performer as 1Q22 earnings fell 54% year-on-year. The average daily turnover for the week was higher at Php3.8Bn, while net foreign selling amounted to USD30Mn. For this week, the index may trade from 6,650 to 6,750 as investors eye the Fed policy meeting on May 3-4 and the national election next week. Meanwhile, due to the presence of significant market headwinds, the Fund will look to lighten up on market rallies while continue accumulating select names that could benefit from a higher interest rate environment.