Click here to print this page


Risk Off For A While
Detractors of Global Growth Rising
28 February 2020
Global growth at risk. COVID-19 will have its biggest impact in the 1Q20, with improvements throughout the year accelerating in the summer months. Even the most optimistic economists have cut China’s GDP forecasts by -0.5% to +5.3% year-on-year (from +5.9% yoy) as a result of COVID-19. With China now slowing more than expected, global growth in 2020 is expected to slow to +2.3% yoy (versus +2.5% originally) led by EM economies shaving 30bps off growth (refer to table 1) to +3.8% (from +4.1% previously). EM Asia is particularly exposed, currently suffering from slower China trade, (for PH value added imports and exports is equivalent to 6% of GDP), fewer tourists (China accounts for the second highest number of tourists in the Philippines), lower commodity prices (Brent crude –15% year-to-date), and supply side disruptions. Sensitivity analysis shows a 1ppt slowdown in demand in China translates to a 0.2ppt growth contraction in EM Asia.
Lots of stimulus coming for the Philippines. Taking a leaf out of the Fed’s playbook, we expect the BSP to continue cutting the policy rate by as much as 25-50bps in 2020 (moving ever so close to the neutral rate or a +3.0% policy rate) and cut the reserve requirement by at least 100bps in an attempt to reinvigorate domestic investments. Inflation will remain subdued (refer to chart 1) at only +3.1% yoy in 2020 given that the price of oil is expected to remain stable at USD50-60/barrel and as we expect rice prices to be stable due to the rice tariffication program. Moreover, lower rates will support the government’s Build, Build, Build Program which will lead the budget deficit expand to +3.2% of GDP in 2020 (from +2.4% of GDP in 2019). A casualty of the government’s enhanced stimulus program will be the Philippine peso, which we believe will weaken by 2.0% yoy to end at Php52.00 to USD1.00 in 2020.
Peso bonds offer solace tactically. Lower inflation expectations due to falling commodity prices, uncertainty surrounding the duration and virulence of the virus, and a 56bps contraction in the 10Yr US Treasury (chart 2) has fuelled a 31bps rally at the long- end of the peso yield curve year-to-date. Whilst we fall short of suggesting the peso bond market will see similar returns to last year’s +19% yoy gain (Peso local currency bond index), we do acknowledge that the BSP will have to cut rates, more than originally assumed, to stem the impact of COVID-19. NEDA’s own sensitivity analysis highlights a 50-70bps reduction in GDP resulting from COVID-19 and its negative impact on tourism overall. If we also impute potential loss in export revenues (15% of the Philippines exports is to China) due to China’s closed borders, expect potentially another 25-50bps cut in the GDP to +5.4% for 2020. We suggest investors increase duration risks in their bond portfolio (on top of buying corporate bonds for yield enhancement) in anticipation of a more aggressive cut in interest rates from the BSP in order to preserve economic growth. 
Downside risks prevail for Peso equities but time to cherry pick. We advise investors to begin buying the PSEi on the dip, hoping for a bounce in 2H20. But as a defensive measure, adopt the principle of cost averaging spreading the purchases to at least 10 different trades (instead of 1). Moreover, we advocate investors to purchase only the index fund (or index issues) as foreign investors will be wary of liquidity risks associated with non-index issues. COVID-19 will be transitory and the ASEAN markets did recover strongly post-SARS (appreciated by +30% yoy in 2004 which more than offset the -13% yoy decline in 2003). We are cognizant of the fact that there are segments of the services sector where demand is lost forever (gaming, energy, and transportation to mention a few), and the likely possibility of a delayed path to normalization for other segments (consumer discretionary and real estate due to the POGO risks, for example). However, despite the aforementioned risks we advise investors to be patient and initiate accumulating the PSEi now that its trading below 7,000 which implies 13.9xfwd PER based on a +10% yoy EPS growth rate. Every time the PSEi drops to 1.0 std dev from its 10Yr mean (17xPER) it rallies back to the mean or in this instance, to 8,212.
Stick to safe haven assets. Disinflationary forces globally are gaining more momentum (Brent prices down -17% yoy) as global growth slows more than expected. Interest rates will have to fall more than expected again to support growth, but lower interest rates will not be effective to promote growth without fiscal stimulus. For this reason we favor USD and Gold assets tactically. The USD will strengthen relative to other DM currencies on the assumption that both the ECB and the BOJ are both out of monetary-policy ammunition. A rise in fiscal spending can be expected but it won’t be nearly enough to avoid both the EU and Japan posting much slower despite its extended run. US corporate earnings, particularly in technology and healthcare sectors, will continue to post strong growth in 2020 (Technology/Healthcare stocks +22% and +31% respectively). Meanwhile, EM economies will suffer from weaker export receipts and a wider budget deficit as a manifestation of COVID-19 (leading to significant currency risks). Given the challenges to global growth, we believe the S&P 500 (chart 3) should end 2020 above its previous high of 3,386. The combination of ample global liquidity (hunt for yield) and more visible earnings trajectory relative to other DM counters, renders the S&P 500 a good safe haven (on weakness below 2,484) for investors looking to weather COVID-19.
Political Risks will overwhelm health risks in the medium term. The biggest risk to the S&P 500 is a Democratic win in the next US presidential election (or Senate) this coming November. A Democratic win is largely viewed as disruptive and will more likely result in even less fiscal spending. However, the market remains convinced that Donald Trump will hold on to power which will be favorable for the S&P 500. Once we get comfortable with the outcome of the US elections and digested the full impact of COVID-19, discussion will once again revert towards China’s relationship with the US. Both the Republican and Democratic political parties see China as a risk to national security. The US has already pivoted its confrontation with China from trade to non-trade focused issues. These efforts will eventually fail in its attempts to limit China’s global influence which will bring the discussion to the sensitive issue of limiting access to capital markets. The US-Sino struggle will continue, which implies the continuation of de-globalization and the new normal for global economic growth to be sub +3.0% p.a. Under this scenario, the 10Yr US Treasury will see more downside risks (yield wise) and will struggle to trade above +2.50%. Both Europe and Japan will struggle to grow economically as global trade sees slower growth rendering them unable to shift from negative interest rate regimes. This will fuel the continued strength of the USD as both European and Japanese savers opt for the positive yield carry.
Carlos A. Jalandoni
VP, AMTC Head of Research
BPI Asset Management & Trust Corporation

Risk Off For A While
More Central Bank Intervention Needed

6 September 2019
US Recession Fears Aggravated By Rising Political Risks. US economic indicators point to an economy that is slowing affected by waning global demand but still operating near full employment (unemployment rate at 3.7% end July 2019). Despite the 2yr/10yr yield curve inversion, we hesitate to conclude that a recession in the USA is imminent in the next 12-18 months. Recessions occur when the Fed raises interest rates rather than cuts them. Moreover, the yield curve is inverting due to disinflationary pressures globally (namely in the EU) causing medium term bonds to seek lower levels as the ECB signals a resumption of quantitative easing and further cuts in its policy rates (which are already negative). No doubt Trump’s latest decision to raise tariffs from 25% to 30% on US$250bn worth of Chinese imports is expected to cause more anxiousness. Businesses will be forced to re-evaluate their capex plans considering the new tariffs will impact a wider cross-section of firms across industries. Not surprisingly, Fed Chair Jerome Powell remarked at the Jackson Hole Economic Policy Symposium that the Fed will ease rates in an attempt to stave of ‘threats to growth’ and deflect disinflationary pressures threatening the economy.
Equities not just yet. Despite expectations of more rate cuts from central banks globally, we encourage investors to re-evaluate investing in equities despite the recent sell off, especially as forward P/E ratios remain above the 10-year mean. The ongoing US-China trade dispute has weighed down on investor sentiment as both parties have escalated the issue by applying tariffs on their respective imports with rising fervency. China’s recent decision to apply a 5% tariff on imports of US crude oil, implies that US exports of as much as 250,000 barrels per day into China will have to be sourced elsewhere. This could push the US economy from a slowdown into a recession considering the global demand for oil is already weak. As for the Chinese economy itself, the fact that retaliations have become increasingly bitter after 17 months has already affected business confidence. This suggests the need for more aggressive rate cuts and RRR cuts leading to an even weaker RMB (possibly beyond USD1:RMB7).
More Stimulus Coming For the Philippines. Budget delays in 2019 coupled by the lagged impact of the BSP’s 175bps hike last year have caused the investment cycle to slow (system wide loan growth of only +10% yoy vs +14% yoy in 2018). As a result, we have downgraded our 2019 real GDP forecast from +6.2% yoy to +5.8% yoy. Come 2020 the situation will be reversed. The BSP has indicated it will continue to lower the policy rate (at least another 25bps by yearend) and reduce the reserve requirement levels just to reinvigorate money supply growth. This is possible as inflation will remain subdued at only +3.0% in 2020 given that the price of oil is expected to remain stable at under USD$70/barrel and we expect at least another -3% yoy contraction in the price of rice. Moreover, we expect the government to meet its fiscal deficit target of 3.2% of GDP. In absolute terms, the 2020 fiscal budget of Php4.1trn is +12% yoy higher and equivalent to 19.4% of GDP.
Changes in the POGO structure could undermine growth. The biggest risk to stronger domestic economic growth in 2020 is the possible changes in the arrangements currently afforded POGO operators. China has made its intentions clear that it is cracking down on gambling activities by its citizens offshore. Any reduction in the presence of POGOs in the Philippines will have a negative impact on growth temporarily considering they accounted for 10% of pre-sales for most developers in the last 3 years. At the end of 1H2019, we estimate that POGOs occupied close to 1M sqm of commercial/office space. The BPO sector could absorb the areas occupied by POGOS but they require only 400K sqm of additional office space every year.
Stick To Safety Haven Assets. The local bond index has outperformed the PSEi by a multiple of 3x (18.1% vs 6.9% year to date) and we expect this will be the case for the remainder of 2019. The Asia Pacific Region (which now trades at its 10yr PER average) will de-rate given that the risk to a further depreciation in the RMB remains high. China knows it can be patient regarding the trade war. President Trump only has until November 2020 (next US presidential election) to find a solution. As the trade conflict escalates we favor traditional safety haven assets USD and Gold. President Trump is pragmatic. A compromise deal is more than likely prior to the elections. But prior to reaching this inflection point, we expect the conflict to escalate further which will undermine any rally in global equities. Global growth is expected to slow more than initially expected (consensus estimates have reduced China’s 2020 GDP estimate from 6.2% to 5.8%) and disinflationary pressures are gaining more momentum (South Korea’s CPI fell to zero in August for first time ever). Interest rates will have to fall more than expected again to support growth, rendering longer duration corporate bonds and high dividend paying stocks ideal safe havens to weather the uncertainty in markets.

Carlos A. Jalandoni
VP, AMTC Head of Research
BPI Asset Management & Trust Corporation

US Treasuries Near Upper Limit
Further Fed Action Will Supress Rally
29 Aug 2019
With the 10yr US treasury now at 1.45%, (down 180 bps since 4Q2018, and at a level not seen since 4Q2016) many ponder whether it will breach the 5-year low of 1.31% on the back of lower than expected in global growth. Much will depend on the resiliency of the US domestic economy, in particular US consumption. Thus far, US consumers have managed to benefit from global disinflationary pressures and withstand the negative ramifications of the escalating US-China Trade war. As of the end of July, the unemployment rate was steady at 3.7% and average hourly earnings rose 3.2% year-on- year (yoy) on the back of 164,000 growth in nonfarm payroll employment. These are hardly signs of economic weakness.
But minutes from the 30-31 July FOMC meeting show Fed concerns about ‘low inflation, risk management and decelerating economic growth.’ There are also other signs of further economic weakness, as sales of recreational vehicles (RV) have come in below 2018 levels during each month of 2019, falling by as much as 20% yoy. In the last three recessions, sales in this auto category have fallen just prior to the recession occurring (see graph below). Similarly, sales of luxury homes (priced $1.5mn or higher) have fallen 5% in the second quarter alone. Existing-home sales only expanded 0.6% yoy in 2Q19 despite home price appreciations slowing considerably and 30-yr mortgage rates falling from 5% (Nov 2018) to 3.75% (August 2019).
All told, whilst we are still firm believers that a full blown US recession is unlikely in the near term, the 10yr US Treasury will most likely reach the 5-year low of 1.31% shortly. Whether it will breach this level will also depend on how proactive the Fed will be in cutting the policy rates to try and stave off a much deeper correction in growth. Encouragingly, the Fed has been transparent on the need to ease rates in order to support growth and mitigate global risks. We believe that this support for the domestic economy will boost investor sentiment such that the 10yr US Treasury will struggle to breach 1.31%; and that it is more than likely overbought at that level.
Carlos A. Jalandoni
VP, AMTC Head of Research
BPI Asset Management & Trust Corporation

The Return to Lower Rates
Here comes the global 'soft landing'
21 May 2019
Ever since the Fed reverted to a more dovish stance as early as November 2018, markets have been cognizant of the prospect of a more pronounced slowdown in economic growth globally (see Fig. 1). The bellwether 10-year US Treasury yield failed to rise above 3.2% (hit a low of 2.34%) after it became evident that all was not well with the global economy. The concern was fueled by mixed economic data coming from the US with housing starts at 3-year lows (+11.2% yy Dec2018) and delinquent auto loans at 7mn (end 4Q2018). This was despite the fact that the unemployment rate has fallen to 3.6% and hourly earnings rose 3.2% yy in April 2019.
In line with consensus we remain convinced that instead of a full-fledged recession, the US economy will post sluggish economic growth that will recover 18-24 months later (see Fig. 2). From our point of view, the Fed’s decision to pause and adopt a more dovish stance was rooted in economic issues that were external more than domestic. Moreover, the Fed’s more dovish guidance regarding interest rates marked a turning point in economic policy with both fiscal and monetary policies now converging to try and salvage any semblance of economic growth globally.
The ECB recently cut its 2019 GDP forecast from +1.7% to +1.1% (see Fig. 3). What Mario Draghi called a ‘sizable moderation in economic expansion that will extend into the current year’, puts into focus whether Germany will follow suit and raise fiscal stimulus after the May EU elections. The result of the May EU elections will not only determine Mario Draghi’s replacement but also indicate whether a more significant fiscal stimulus is forthcoming in the 2020 EU budget. Currently, the expectation is the Eurozone budget deficit will widen to -1.1% in 2019 from -0.6% in 2018. However, more fiscal stimulus is needed since this latest budget expansion will only add 0.3% to GDP growth this year. Much will really depend on the state of the German economy which continues to weaken as suggested by the April manufacturing PMI which stood at 44.5 due to industrial orders falling -4.2% mm in February (contracting 7 months out of the last 9 months) and falling exports due to weaker global demand.
China also has its own economic challenges in 2019, which explains why it has joined the stimulus bandwagon. China’s economic growth rate is expected to slow to 6%-6.5% in 2019 (vs +6.5% 2018) on the back of ongoing trade tensions with the US and continued efforts to deleverage its state owned enterprises (SOEs) (see Fig. 4). Recent efforts to reallocate credit away from SOEs to the private sector by easing banks’ capital constraints, boosting loanable funds via RRR cuts, and lowering funding costs should be positive for growth. On the fiscal side, the budget deficit was expanded marginally from -2.6% (2018) to -2.8% (2019) which should pave the way for an additional tax cut equivalent to USD194bn (+18%yy). So far, these measures have had a positive impact highlighted by China’s industrial production growing +8.5% yy in March 2019 (well above expectations) and property sales growing +1.8%yy (versus -3.6% yy decline in Jan/Feb 2019). As a result, China’s 1Q19 GDP growth stabilized at +6.4% yy, well ahead of market expectations.
The dominant currency will be the USD in 2019 as a result of Europe and Japan suffering from slower economic growth (see Fig. 5). Aside from the positive carry, the lack of monetary/fiscal options in both Europe and Japan (both the BOJ and the ECB are still maintaining negative policy rates) only strengthens the relative position of the USD. Moreover, weaker global trade borne out of a weaker global economy is expected to have a bigger concern for EM currencies than any potential uplift from lower rates overall globally. This is clearly the case for the PHP which is expected to weaken approximately 3.0%-3.5% per annum to Php53.50 (2019) as guided by the BSP due to the government’s intent to run a widening budget deficit and current account deficit in order to support growth.
We maintain a favorable outlook for Philippine issued bonds— either local government securities or corporate bond—in lieu of inflation falling faster than expected and the Fed’s more dovish tone (see Fig. 6). The expected reduction in the budget deficit because of the delay in the budget process reduces the net government financing needs by Php200bn – Php350bn. This suggests that the succeeding government issuances (domestic) may only be used to rollover the maturing debts in 2019. We believe the front end of the yield curve will offer more value going forward as we anticipate yield reduction in line with expectations that the Fed will cut rates in 2020 in response to a slowing domestic economy.
There are questions about the ability of the BSP to lower the policy rate (and ease the liquidity situation locally) given that the price of oil has recently reached USD$75/barrel (a 5-month high). Oil spiked again after the United States said that they were ending all exemptions for buyers of Iranian oil (OPEC’s 3rd largest producer). We believe these investor concerns will soon pass as the Philippine economy is well placed to see both declining inflation (headline inflation has fallen for the 6th straight month to 3.0% in April) and improved liquidity conditions. We expect a cut in the reserve requirement rate as early as the May 09 BSP Monetary Board meeting (see Fig. 7). Even if the price of oil rises to USD$75/barrel (vs our initial estimate of USD$67.5/barrel), our calculation shows that headline inflation will only rise to +3.0% yy—still well within the 2-4% range set by the BSP.
The PSEI has struggled to break out of the 7,753 – 8,032 range due to foreign investor concerns about the impact of slowing global growth in EM. These concerns will be temporary and, strategically, the outlook for the PSEI remains constructive. PSEI companies are expected to post strong earnings growth of +12.9% yy in 2019 (vs +9.9% yy in 2018) led by rate cyclicals (the financial and property sectors) who are seen to benefit from lower interest rate expectations. But the tactical outlook for the PSEI remains volatile for the remainder of 2019 as foreign outflows equivalent to USD240m are expected to be reallocated by foreign investors away from the Philippines to China. Recall that MSCI will raise the percentage assigned to China A shares in its Global Emerging Market Index from 5% to 20% by the end of the year. We advise investors to be opportunistic accumulating only when the PSEI is trading below its long term average of 17xPER (or 7,800 based on +12% yoy eps growth). The recent rally spurred by the surprise credit rating upgrade of the Philippines by S&P to BBB+ will eventually succumb to concerns about the higher allocation afforded China in the MSCI EM Index.
The case for USD assets (bonds or equities) remains uncertain largely due to US economic data giving mixed signals. Those with bearish tendencies point to declining new home sales which fell (-6.9% yy) at the end of 1Q19 despite mortgage rates falling from 2018 highs and house price inflation slowing. On the other hand, those that are more optimistic highlight real GDP rising +3.2% yy at the end of 1Q19, surpassing consensus estimates of +2.3%yy. Stronger growth was led by real inventories which increased for the 3rd quarter in a row and net trade contributing +1.0 ppt to 1Q19 GDP. Whilst the futures market is pricing in a 53% probability of a rate cut by end-Jan 2020, this runs counter to the Fed’s dot plot which suggests a rate increase come 2020. So despite the fact that short VIX positioning for the S&P has hit its previous all-time low (see Fig. 8), we stop short of taking more US equity risk for fear of extended valuations.

Carlos A. Jalandoni
VP, AMTC Head of Research
BPI Asset Management & Trust Corporation

Print this page Email as link Email as text Download PDF Share via Facebook

Embrace The Volatility
Best To Be Diversified In International Equities
21 November 2018
Local investors felt the benefit of shifting from a purely peso investment portfolio to a multi-currency portfolio after the peso depreciated 5.3% year-to-date (see Fig. 1). To make matters worse, we expect the peso to depreciate at least 3.0% per annum as the economy experiences the twin deficit problem — a rising current account deficit and an expanding budget deficit. Despite the recent heightened volatility (the VIX hit a high of 37 year-to-date), we still believe US equities offer more upside potential tactically relative to their global peers given the strength of the underlying economy. However, we encourage investors looking for international equity exposure to avoid pure plays and instead opt for a more diversified global equity portfolio. The S&P 500’s current valuation is stretched, trading at a 5% premium to its 10-year forward-PER average (17.7x) which will render it vulnerable to profit taking and more volatility in the foreseeable future.
Figure 1. USDPHP exchange rate
The US economy is surging. The US economy is expected to grow 2.5% in 2019, slower than 2018’s 2.9% growth. However, this is coming off a high base marked by S&P 500 corporate earnings expanding 16% yy in 2018 (excluding tax benefits). Based on 82% of the S&P 500’s market capitalization that have reported 3Q18 earnings year-to-date, 73% of companies have surpassed bottom-line estimates by an average of 6.4%. Moreover, the labour market is expected to remain tight (if not tighten further) given that the economy continues to add 213K jobs per month (see Fig.2). The average unemployment rate in the last three months stood at 3.8%, a rate not seen since 1999/2000. Similarly, average hourly earnings growth rose to 3.1% yy and the labor force participation rate inched higher to 62.9% in October (vs. 62.7% in September).
Figure 2. US GDP vs US Non-farm payroll
Be wary of rising bond yields. The rise in volatility in the S&P 500 is attributable to the Federal Reserve’s (Fed) indication to raise the Fed funds rate above what it deems the neutral rate (2.75%-3.00%). This effectively implies up to four (4) more 25bps rate hikes from the FOMC in the next 12 months, followed by a pause (see Fig. 3). Rising bond yields until recently signaled increasing confidence from the Fed that the economic recovery has finally gained momentum. But after the Fed raised its benchmark rate for the 8th time (since 2015) last September 2018, investors have become warier of further rate hikes. In fact, many see further rate increases as a step closer to slower economic growth and possibly a recession. There is no doubt that President Trump will be under greater scrutiny after the Democrats regained control of Congress, rendering Washington less able to pass legislation. However, we don’t see a divided Washington deterring the Fed from its current tightening path, which implies that we could still expect more volatility for the S&P 500.
Figure 3. US Treasury Yield Curve
The case for EM rises with lower oil prices. The price of oil has fallen by as much as 20% from four-year highs after the Trump administration’s recent decision to issue waivers to eight countries (including China, South Korea, India, Japan) allowing continued purchases of Iranian oil for a six-month period (see Fig. 4). Lower oil prices will continue to give relief to EM Asia currencies as the market discounts the potential improvement in their respective balance of trade. All told, the combination of compelling valuation (EM Asia now trading at 10.4x forward-PER or 11% discount from its 10-year mean), a resurgent local currency, and resilient earnings growth picture in 2019 (11.8% eps yy 2019 vs 14.3% yy eps 2018) should prove too much to resist for investors who are currently heavily underweight Asia.
Figure 4. Historical Oil Prices
Improved EM prospects will favour EU equities. Reported earnings for 3Q18 have been underwhelming thus far, on track to report +8.4% yy for 2018 (vs. +12.2% yy for 2017) due to lower trade receipts. But consensus estimates place EU companies posting stronger EPS growth in 2019 to +10.0% yy (vs. +8.4% yy 2018) despite the weakness in 3Q18 (see Fig. 5). Any recovery in EM next year and any relief in the US-China trade war issue will be more beneficial to EU given that 30% of export receipts are derived from EM (vs. only 15% for the US). Moreover, with US real GDP growth rate expected to slow to +1.8%yy in 2020 (vs. +2.5% 2019), Fed tightening is expected to pause. This should help narrow the US/Bund interest rate differential across the yield curve, which currently is at levels not seen since the late 1980’s.
Figure 5. Stoxx Europe 600 Index
Improved economic prospects for EM in the next 12 months are deemed favourable for EM/EU equities alike. The culmination of lower oil prices, de-escalation of trade tensions between the US and China, and a possible extended pause in the Fed’s hiking activities are seen to weaken the USD and favour EM. We encourage investors to diversify into international equities through the BPI Global Equity Fund of Funds to reduce the volatility in their portfolios (see Fig. 6).
Figure 6. BPI Global Equity Fund-of-Funds

Carlos A. Jalandoni
VP, AMTC Head of Research
BPI Asset Management & Trust Corporation

Print this page Email as link Email as text Download PDF Share via Facebook

Next Fed Chair Is Big News There is only one safe choice
Selection for next Fed Chair is huge.
26 October 2017
Who will replace Federal Reserve Chairperson (Fed Chair) Janet Yellen will determine the course of markets for the rest of 2017. Yellen’s term as Fed Chair will end in January 2018; President Trump has indicated that he will announce a replacement as early as 2Nov2017. Global markets wait with bated anticipation if Yellen will be extended or be replaced by somebody hawkish—one who advocates a much faster upward trajectory for interest rates. A more hawkish Fed Chair would not only drive interest rates higher more quickly, but could also result in a much stronger USD. Recall that the PSEi declined 20% in the 2H2016 due to the renewed strength in the USD coming from the Trump reflation trade.

The short list. President Trump has four top candidates: Kevin Warsh, Jerome Powell, Janet Yellen and John Taylor. Among them, Taylor is the most hawkish, believing that interest rates today should be at 2.5%, twice the current level of 1.25%; while Yellen is the most dovish—advocating slower rate hikes. Meanwhile, Warsh’s lack of experience renders him less likely to assume the position. The current front-runner, Powell, is seen as a soft spoken centrist who represents continuity like Yellen.

Trump’s agenda matters. Investors have so far ignored the potential disruption a more hawkish Fed Chair would bring to markets; the S&P 500 (2,575.21) and Dow (23,328.63) eking out new highs last week highlighted this. This is not surprising: investors believe their agenda is in-line with Trump’s goals. As much as conservative Republicans want a change from Yellen, we believe the Trump Administration prefers a continuity of current monetary conditions as it is favorable to wealth creation. The combination of a weaker USD and low interest rates has also boosted US corporate profits (+12% YoY 2018), underpinning the recent rerating in US equities.

Yellen again. We believe it is in the best interest of the economy (and markets) that Yellen is reappointed. While the economy is clearly on the path to recovery, it remains fragile as highlighted by the stubbornly low inflation rate. This is crucial since the biggest criticism of Yellen’s dovish era is the risk of being behind the curve—or not having high enough interest rates—which could lead to runaway inflation. But this is more manageable compared to Taylor. The risk here is destabilizing the economic recovery by raising rates too quickly. Recent history has shown that it is always easier to slow an overheating economy than it is to reinvigorate a slowly growing one.

Carlos A. Jalandoni
VP, AMTC Head of Research
BPI Asset Management & Trust Corporation

Print this page Email as link Email as text Download PDF Share via Facebook

This report, and any electronic access to it, is restricted to and intended only for clients of Bank of the Philippine Islands Asset Management and Trust Group ("BPI AMTC") or a related entity to BPI AMTC (as the case may be) who are institutional investors and who are allowed access thereto (each an "Authorized Person") and is subject to the terms and disclaimers below.


This report provides information and opinions as reference resource only. This report is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice. It is not to be construed as a solicitation or an offer to buy or sell any securities or related financial products. The information and commentaries are also not meant to be endorsements or offerings of any securities, options, stocks or other investment vehicles.

The report has been prepared without regard to the individual financial circumstances, needs or objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Readers should not rely on any of the information herein as authoritative or substitute for the exercise of their own skill and judgment in making any investment or other decision. Readers should independently evaluate particular investments and strategies, and are encouraged to seek the advice of a financial adviser before making any investment or entering into any transaction in relation to the securities mentioned in this report. The appropriateness of any particular investment or strategy whether opined on or referred to in this report or otherwise will depend on an investor’s individual circumstances and objectives and should be confirmed by such investor with his advisers independently before adoption or implementation (either as is or varied). You agree that any and all use of this report which you make, is solely at your own risk and without any recourse whatsoever to BPI AMTC, its related and affiliate companies and/or their employees. You understand that you are using this report AT YOUR OWN RISK.

This report is being disseminated to or allowed access by Authorized Persons in their respective jurisdictions by the BPI AMTC affiliated entity/entities operating and carrying on business as a securities dealer or financial adviser in that jurisdiction (collectively or individually, as the context requires, "BPI AMTC") which has, vis-à-vis a relevant Authorized Person, approved of, and is solely responsible in that jurisdiction for, the contents of this publication in that jurisdiction.

BPI AMTC, its related and affiliate companies and/or their employees may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by BPI AMTC its related companies or associated/affiliated persons.

BPI AMTC and its related and affiliated companies are involved in many businesses that may relate to companies mentioned in this report. These businesses include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and corporate finance.

Except with respect the disclosures of interest made above, this report is based on public information. BPI AMTC makes reasonable effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. The reader should also note that unless otherwise stated, none of BPI AMTC or any third-party data providers make ANY warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data.

Proprietary Rights to Content. The reader acknowledges and agrees that this report contains information, photographs, graphics, text, images, logos, icons, typefaces, and/or other material (collectively “Content”) protected by copyrights, trademarks, or other proprietary rights, and that these rights are valid and protected in all forms, media, and technologies existing now or hereinafter developed. The Content is the property of BPI AMTC or that of third party providers of content or licensors. The compilation (meaning the collection, arrangement, and assembly) of all content on this report is the exclusive property of BPI AMTC and is protected by Philippine and international copyright laws. The reader may not copy, modify, remove, delete, augment, add to, publish, transmit, participate in the transfer, license or sale of, create derivative works from, or in any way exploit any of the Content, in whole or in part, except as specifically permitted herein. If no specific restrictions are stated, the reader may make one copy of select portions of the Content, provided that the copy is made only for personal, information, and non-commercial use and that the reader does not alter or modify the Content in any way, and maintain any notices contained in the Content, such as all copyright notices, trademark legends, or other proprietary rights notices. Except as provided in the preceding sentence or as permitted by the fair dealing privilege under copyright laws, the reader may not reproduce, or distribute in any way any Content without obtaining permission of the owner of the copyright, trademark or other proprietary right. Any authorized/permitted distribution is restricted to such distribution not being in violation of the copyright of BPI AMTC only and does not in any way represent an endorsement of the contents permitted or authorized to be distributed to third parties.

Additional information on mentioned securities is available on request.
Jurisdiction Specific Additional Disclaimers:

Without prejudice to the foregoing, the reader is to note that additional disclaimers, warnings or qualifications may apply if the reader is receiving or accessing this report in or from other than the Philippines.

Analyst Certification:

The views expressed in this research report accurately reflect the analyst's personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

Click here to print this page