Financial Blog

Fixed Income Market

Fitch Ratings Agency downgraded the Philippines’ outlook from stable to negative while retaining its Investment Grade (IG) Rating of ‘BBB.’ As unexpected as it was, it was not a surprise as Fitch already sounded off as early as last March 2021. Moody’s also echoed similar sentiments and is likely to release an outlook downgrade as well. This recent downgrade will put the Philippines’ current IG status at risk for the next 12-24 months but is also not a foregone conclusion. Improving the pace of vaccination as well as peaking inflation could quickly turn the current outlook back to stable or even positive. Secretary Dominguez was quick to respond stating that the pandemic impact is temporary and with recent re-openings, the former also mentioned he expects double-digit growth moving forward.

Markets could react negatively to this recent development. Despite the fact it is widely believed that the downgrade is priced in, the risk of a credit downgrade should not be discounted. A steepening bias over the next few weeks is expected with the short dates (1-3 years) expected to hold steady with lower growth expectations. Ultimately, US rates and inflation remain the biggest catalysts for local rates. US Treasury notes gapped lower this month with the 10-year hitting a low of 1.25% before retracing back to 1.36% current. Local yields lagged the US with PHP currency breaching 50 vs the USD.

As of this morning, local bond prices are just wider with yields pulling back 3-7 bps. No sell-off was seen as players opted to unload via Open Market Operations (or the BSP’s OMO which is limited to Treasury groups of banks where banks can sell securities directly to BSP via the OMO). This is good as supply will be drained of the market as sizeable off-market deals were seen which is most likely a result of OMO selling. Total deals via OMO is estimated at 12-15B today mostly on tenors 7 years below. Peso also saw sellers at the recent highs of PHP50.30. Nonetheless, we approach this event with much caution.

Equities Market

Historically, negative outlook news from ratings agencies lead to sell-off in risk markets as an initial reaction. We think it will not be different this time. This downgrade was not expected though somehow was on some people’s minds. We believe that the equity markets may have already discounted the revised outlook by Fitch. The stock market has seen over $5.5bn of outflows since 2018 and foreign ownership is at the lowest level it has ever been for over a decade. Furthermore, corporates have already guided that they do not see mall traffic and leisure travel among others to revert to pre-pandemic levels until the end of 2022. The biggest factor that will drive the equity markets in the short term is the vaccination rate and when the country can reach population protection and eventually herd immunity.

Any sell-off will remain to be a good entry-level for stocks as the recovery story remains intact though delayed. A correction should therefore be seen as a buying opportunity as we still see decent upside given the falling number of Covid-19 cases, the accelerating pace of vaccinations, the potential peaking of inflation, and the recovery of corporate earnings.