Online brokerage firm COL Financial reduced its year-end target on the Philippine Stock Exchange Index to 8,750 points from 9,300 points due to expectations that inflation and interest rates will likely be higher this year.
COL Financial vice president and head of research April Lynn Tan said in a report the January inflation rate of four percent was a surprise and exceeded the consensus forecast of 3.5 percent. The latest data on trade deficit showed the gap widening to $4 billion, resulting in a sharp increase in Philippine 10-year bond rates and the depreciation of the peso against the dollar.
“Due to expectations that inflation and interest rates will likely stay elevated, we raised our risk free rate assumption by 50 basis points to 5.5 percent. This led to a downgrade in our fair value estimates and our end 2018 target for the PSEi from 9,300 to 8,750,” Tan said.
She said the PSEi could bottom anywhere from 7,900 to 8,100, adding the correction could happen between March and May this year.
Tan said the current correction in the stock market should provide a great opportunity for investors to enter the market at more attractive levels.
“We don’t think inflation will stay elevated on a permanent basis as some of the factors pushing up inflation rate are non-recurring in nature. Moreover, BSP (Bangko Sentral ng Pilipinas) has the necessary tools to control inflation,” Tan said.
Meanwhile, Bank of the Philippine Islands chief economist Emilio Neri Jr. said in an interview said expects the Bangko Sentral ng Pilipinas to raise interest rates twice this year, with the first rate hike early as next month during its policy meeting.
Neri said the central bank would likely raise policy rates by 25 basis points during its March 22 meeting and another rate 25 basis points increase could be implement in the third quarter of 2018.
“We are now starting to feel the pain that comes with tax reform. This will mean that BSP will increase interest rates at least twice this year. We thought BSP could afford not to increase interest rates this year but with the January inflation rate, BSP may have to raise rates once or twice this year,” Neri said. Jenniffer B. Austria