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Government bonds will remain the most attractive, but stocks deserve a review

By on April 22, 2021 0

MANILA, Philippines – Government bonds are likely to remain attractive to investors as rising inflation and bleak economic prospects put them on the safe side, although riskier assets and stocks may be worth investing in. examined, in particular with the central bank which is committed to keeping rates low for the time being. .

“ROPs will continue to attract slightly investors looking for better returns in stable currencies, especially given the country’s strong external position,” analysts at First Metro Investment Corp. said. (FMIC), an investment bank, and the University of Asia and the Pacific (UA&P) said in its joint monthly report released Thursday.

Based on FMIC and UA&P monitoring, local 10-year bond yields finally “corrected” from their 11-month high of 4.66% on March 22 despite rising yields on US Treasuries and a decline. slight easing of inflation in the country.

This is all thanks to Bangko Sentral ng Pilipinas’ promise to keep interest rates low to stimulate economic activity, even in the face of growing inflation risks. With rates held at bay and against a backdrop of a deteriorating economic outlook, investors are likely to scold government securities, viewed as a safe haven with little chance of default.

At the same time, however, the FMIC and AU&P said that a “stable” environment at low rates, which the central bank had announced would stay for some time, should encourage investors to diversify into riskier corporate bonds. Companies are willing to borrow to replace declining profits, the researchers said, and “are therefore willing to take the risk of piling up debt papers.”

“We’ve already seen interest rates at their highest and lowest points. With the benchmark rates stabilizing, we don’t see them crossing their thresholds unless a major catalyst emerges, ”they said.

Risk appetite can even extend beyond bonds to stocks. After projecting that the Philippine Stock Exchange index is set to stay at the 6500 level for the second quarter, FMIC and UA&P now say the stock market could rebound “more definitely” as the economy takes hold. the extent. Listed companies that have a direct or indirect relationship with infrastructure development are expected to benefit the most.

Indeed, analysts have pointed to better economic numbers, including job creation and manufacturing performance, since the release of the last monthly report. They noted new restrictions imposed in Metro Manila and four neighboring regions, but barely skimmed over their implications, saying that brighter economic data recently – including a slowdown in inflation – has provided a “sigh.” of relief ”.

“Headline inflation has eased … Nonetheless, we expect it to stay above 4.0% in the first half (first half), as core inflation has not budged and supply-side concerns are reappearing, ”analysts said. Inflation, as measured by the consumer price index, averaged 4.5% year-on-year in March.

In the bond market, improving demand for longer-term government bonds is pushing yields lower after a brief fear of rising US Treasury yields. However, the FMIC and AU&P have warned that this could be short-lived unless inflation falls below the upper bound of the BSP’s 2-4% annual target by the second quarter, “Which, in our opinion, will not happen”.

“With the national government’s cash position still plump, its new net borrowing in the market would have little effect, and domestic inflation therefore remains the key metric to watch and analyze closely,” FMIC economists said and from the AU & P.