Local equities face heightened downside risks this week as the worsening Middle East conflict sparks energy price spikes, compounding domestic growth and inflation worries.

Escalating tensions involving the United States (US), Iran, and Yemen-based Houthi militants have driven global oil benchmark Brent crude toward $100 per barrel. Sustained energy price increases threaten to reignite inflationary pressures in the Philippines, presenting a direct headwind to economic expansion and corporate profit margins.

Investors are also weighing local policy cues from President Ferdinand Marcos Jr.’s State of the Nation Address alongside key US economic data and the upcoming Federal Reserve interest rate decision.

Philstocks Financial Research Manager Japhet Tantiangco noted that the Middle East crisis adds to an already troubling backdrop of slowing domestic economic growth and sticky inflation.

Further currency depreciation poses another risk, as weaker peso elevates import costs for key commodities. Tantiangco warned that potential new US tariff threats could compound import expenses and exacerbate price pressures.

At the same time, equities face competition from the fixed-income sector, where Philippine treasury yields are climbing as bond investors price in higher long-term inflation expectations.

Monetary policy decisions in Washington and domestically remain central to market positioning. With average US inflation holding at 3.3 percent during the first half of the year, market expectations have shifted toward potential policy tightening.

Analysts at F. Yap Securities highlighted that crude oil's recent rebound has effectively eliminated near-term Fed rate-cut expectations, reintroducing hawkish risks of one to two rate hikes.

For emerging markets like the Philippines, elevated risk-free yields and a resilient US dollar will likely maintain a hard cap on foreign equity inflows. Nationally, the Bangko Sentral ng Pilipinas is expected to maintain a firmly hawkish stance at its Aug. 27 policy meeting to counter second-round effects across agriculture logistics, transport tariffs, and general consumer spending.

In the immediate term, market participants are looking to President Marcos’ upcoming address for policy commitments aimed at stimulating economic activity and taming inflation. Brokerages advise investors to remain selective ahead of second-quarter corporate earnings, steering allocations toward high-conviction dividend-paying equities, energy producers, and infrastructure firms capable of passing on cost increases. Select banking stocks may also benefit from sustained net interest margins under a higher-for-longer interest rate regime.

Among individual stock recommendations, COL Financial maintained a BUY rating on Bank of the Philippine Islands despite a modest decline in second-quarter net income driven by higher loan-loss provisioning. The brokerage cited the bank’s solid capital position and earnings buffers as sufficient protection against consumer lending risks, keeping its long-term growth prospects intact.

Separately, RCBC Securities reiterated a BUY rating on Aboitiz Power Corp. following recent adjustments to the Philippine Stock Exchange’s index criteria, which position the power producer for potential inclusion in the benchmark index by February 2027.