While investors show optimism amid expectations of an interest rate cut by the US Federal Reserve and the Bangko Sentral ng Pilipinas, some volatility may still be seen as it may take two more months before this finally happens.
Online brokerage firm 2Tradeasia.com noted how “deeply entangled the broader market still is on the inflation-interest rate story. Brace for interim volatility as a rate cut likely would not be confirmed until September, and speculation tends to skew prices towards the extremes instead of the mean (prone to whiplash).
US inflation cooled off more than expected in June, as the US CPI printed to three percent versus the 3.1 percent consensus and decently lower from 3.3 percent in May.
“To put this in more context, this is the lowest reading so far in almost 12 months. Markets are consequently pricing in 90 to 100 percent likelihood for a September rate cut (compared to the 70s to 80s probability surveyed weeks prior),” the brokerage said.
It added that, “the Fed Chair's comments that inflation need not hit the 2 percent target before starting rate cuts likewise boosted optimism… Expect markets to tie gyrations alongside July and August inflation to confirm the trend.”
With the Fed's tone much more upbeat than in the second quarter, 2Tradeasia.com said a local rate cut from the BSP is looking more visible after officials commented that there is more scope for an ahead-from-the-Fed rate cut.
“More supportive data (lower energy and food inflation) plus less erratic forex movements contribute to macro tailwinds ahead of the second quarter earnings reporting season,” it noted.
For stock picks, COL Financial has a BUY rating for Universal Robina Corporation “as we continue to like the company given its strong core branded business. We expect earnings growth this year to be supported by sustained volume growth and margin recovery for the core business on the back of favorable raw material lock-ins coupled with deliberate actions to optimize operational efficiencies.”
“At current prices, we estimate that URC is trading… below its 5-year historical average… Upside potential relative to our fair value estimate is also significant at 33 percent,” it added.
COL also has a BUY rating on BDO Unibank “as we believe that it is well-positioned for growth, even amidst challenging economic conditions, with its liquid balance sheet and wide branch network.”
“While interest rates remain elevated, BDO’s strong deposit franchise will play a key role in managing net income margin (NIM) and enhancing profitability.
Meanwhile, in the face of impending rate cuts, we believe that BDO has implemented enough changes to defend against downward pressures on NIM,” the brokerage said.