The Global Market Overview

 

Most markets in Asia ex-Japan rose in July, as a new aid plan for Greece assuaged concerns Europe’s debt crisis will spread. However, the equity markets in the region were captive to the U.S. debt ceiling debate. Investors were also struggling to retain their balance amid the slowing of the Chinese economy and the release of quarterly/half-year earnings.

 

In August, Asia ex-Japan equity markets saw an across-the-board sell-off, triggered by Standard & Poor's downgrade of its U.S. sovereign credit rating. Rising fears of recession in the U.S. and continued concern that the euro zone debt crisis may widen contributed to the rout in the region's markets. Economic data released in August showed growth in Asian nations in April to June eased.

 

Asian shares retreated for a second consecutive month in September amid volatile trade, sending the regional benchmarks to their biggest loss since October 2008, the height of the credit crunch. Concern that Europe’s debt crisis is spreading and fears of a hard landing in China joined the witches’ brew that troubled investors. Most of the monetary policy makers in Asia held off increasing borrowing costs in September amid concerns that global expansion is faltering. The central banks of Korea, Indonesia, Malaysia and the Philippines avoided raising interest rates in September following increases earlier this year. While inflation rates remained elevated in the region, there were signs of some tapering off in headline inflation rates and inflation expectations, which eased the tightening pressures on central banks. On the other hand, the persistent inflationary pressures in India led to another rate hike in policy rate in the month of September.

 

Against such a risk aversion backdrop, Asian markets ex Japan slipped as measured by MSCI Asia Ex Japan which declined by 21.6% (in US dollar terms) for quarter ended September 2011.

 

 

The Philippines Market Overview

 

• GDP: Economic growth moderated to 3.4% year-on-year in 2Q11 from 4.6% in the previous quarter.

 

Remittances from overseas Filipinos workers (OFWs) totalled US$1.715 billion in July, up 6.1% from the previous year but down 1.3% from June.

 

Fiscal position shifted to a surplus of PHP9.2 billion (US$22.25 million) in August, a sharp turnaround from the PHP26 billion deficit in July. In the first 8 months of 2011, the fiscal deficit totalled PHP34.5 billion as compared to PHP228.1 billion in the same period last year.

 

• Inflation: Inflation moderated to 4.7% year-on-year in August from 5.1% in July using 2006 as the base year.

 

• Currency: The peso’s performance lost ground against the US dollar for the quarter ended September 2011.

 

• Politics: On the political front, President Noynoy Aquino’s net approval rating rose in September from June, according to a poll by the Social Weather Station.

 

The next presidential election is not due to be held until 2016. Under the constitution, Mr Aquino will not be permitted to stand for re-election. Elections will be held in May 2013 for one-half of the seats in the Senate and the entire House of Representatives.

 

• Equity Market: The Philippine Stock Exchange Index (PSEi) registered negative returns of 6.8% in local currency terms for the second quarter 2011 compared to a hike of 5.8% in the previous quarter.

 

• Bond Market - Local currency bond: Philippines local currency bond markets as measured by HSBC Philippines Local Currency Government Bond Index (in local currency) increased 4.2% for the quarter ended September 2011 versus the hike of 2.8% in the previous quarter.

 

In July, risk aversion continued to rise as the combination of weaker-than-expected US economic data, political wrangling over the US debt ceiling, as well as concerns over the European sovereign debt crisis negated positive news flow on corporate earnings. The risk averse environment encouraged further flight-to-quality flows and drove G3 (US, Japan and Germany) interest rates lower. Against the backdrop of declining global interest rates, coupled with sustained inflows into emerging market bond funds, yields of the Philippines government bonds fell over the month.

 

External events continued to be the key drivers of the Philippines bond markets in August. Amidst the strong risk aversion and growing recessionary risks, investors fled from risky assets to seek refuge in lower-risk assets, including the US Treasuries, which saw 10-year Treasury yield hitting record lows at various points of the month. The Philippines local government bond yields, too, fell in tandem, resulting in a positive gain of the market over the month. The decline in short rates was also supported by expectation of a pause in rate hikes by the central bank given the murkier growth outlook, while inflation expectations eased.

 

In September, risk aversion continued to mount as concerns over the Eurozone sovereign debt crisis and a faltering global economy intensified. Against this risk-averse backdrop, emerging market local debt funds experienced significant outflows during the month, reversing the inflows seen earlier in the month. The outflows, which were driven mainly by the deteriorating risk appetite and weakness in Asian currencies, exerted upward pressures on Asian local government bond yields despite the generally lower interest rates in the G3 countries. Yields of the Philippines government bonds, too, rose in tandem.

 

• Bond Market – USD bond: The JP Morgan USD EMBIG Philippines index rose for the quarter ended September 2011.

 

Performance of the Philippines USD-denominated sovereign bonds benefited from the declines in US Treasury yields, while credit spreads of the Philippines sovereign bonds remained resilient despite the rise in global risk aversion. The stable credit spreads of Philippines USD-denominated sovereign bonds was supported by the positive sentiment on the country and the sustained inflows into emerging market bonds.

 

External events continued to be the key drivers of the Philippines bond markets in August. Against the backdrop of strong risk aversion and growing recessionary risks, global investors fled from risky assets and sought refuge in government bonds. US Treasuries, too, benefited from the flight-to-quality flows as treasury yields fell significantly. The decline in US interest rates contributed positively to the returns of the Philippines USD-denominated sovereign bonds and led to an overall gain over the month.

 

In September, risk aversion continued to mount as concerns over the Eurozone sovereign debt crisis and a faltering global economy intensified. Against this risk-averse backdrop and increased outflows from emerging market bond funds, credit spreads of the Philippines USD-denominated sovereign debt widened significantly in tandem with the broader emerging market bond market. The widening of credit spreads led to a decline in the USD-denominated Philippines government bonds over the month, although the decline was mitigated by falls in US interest rates.

 

 

Strategy & Outlook

Equity

The fund manager is positive on the long term outlook of the Philippines in view of its economic resilience and improvement in macro fundamentals. However, the fund manager is mindful of the risks of potential market correction due to a spike in risk aversion and uncertain external environment, and will continue to monitor the macro situation while maintaining our bottom-up, valuation-driven investment approach.

Bond

USD – Going forward, the fund manager intends to keep the portfolio at neutral duration.

 

Peso – The Fund is currently neutral duration versus the benchmark, as the bond market appears fairly valued in the absence of rate cut by the central bank.