The Philippine stock market benchmark, the PSEi, had been stuck in the doldrums for months—trading within a tight 200-300 point band—before crashing below its support level to a nine-month low and underperforming other regional and emerging markets.
China Bank Capital Corporation Managing Director Juan Paolo Colet said this is due to a combination of factors led by “concerns that Philippine GDP (gross domestic product) growth will undershoot the government’s full year target of at least 6 percent.”
“The local market's breach of the 6,400 level (previously considered as a support), and its eventual decline to its 9-month low, happened after the second quarter GDP data release,” said Philstocks Financial Research Manager Japhet Tantiangco.
He noted that, “with this, we can say that the bearish movements of the market recently can be attributed mainly to the dismal second quarter GDP data wherein we saw a slowdown in our GDP growth, and even a 0.91 percent contraction in our economy in the second quarter if we are to look at it from a seasonally adjusted quarter-on-quarter perspective.”
“Prior to the second quarter GDP data release, despite the headwinds we've encountered, the market moved sideways buoyed by hopes that the economy will be able to continue performing strongly. And so, with the hopes failed with the second GDP data release, the market declined,” Tantiangco said.
COL Financial Chief Equity Strategist April Tan said, “growth decelerated as government spending dropped 7.1 percent in the second quarter of 2023… Gross capital formation or investment spending also disappointed as it was flat year-on-year.”
While consumer spending grew 5.5 percent, she pointed out that, the “pace was at the lower end of its historical growth rate. Excluding the pandemic, the last time consumer spending growth slowed to 5.5 percent was in the second half of 2018 when inflation increased due to rising rice prices. Inflation rate was also high during the second quarter of this year, averaging 6.0 percent.”
Tan also said that “GDP growth could remain subdued for the rest of the year. Although inflation has peaked, interest rates remain elevated as the U.S. Fed remains on a tightening cycle. Moreover, inflation could surprise on the upside given the negative impact of the El Nino phenomenon on the crop yields and food prices.”
“Although NEDA Secretary Arsenio Balisacan said that government spending will accelerate in the coming quarters and allow it to recover its growth momentum, it might be difficult for it to make up for the significant weakness in the second quarter, especially due to the onset of the rainy season and government’s effort to reduce its budget deficit,” she added.
Meanwhile, Colet said upside risks to local inflation, a potentially longer period of high interest rates, and China’s economic slowdown has also dampened sentiment on emerging market risk assets.
“Adding to the bearish sentiment is the hawkish stance of the Federal Reserve; mounting inflationary risks primarily in food, oil, and the Peso's decline; and the BSP (Bangko Sentral ng Pilipinas) which cannot take a dovish stance yet despite the local economy's weakened growth as inflation remains above target,” said Tantiangco.