Financial Blog

Fixed Income Report

It’s been a crazy year to say the least, as the 2nd quarter comes to a close, investors are still feeling the gut punch for the Bond Markets last March. April and May have seen stability which was absent for the better part of 2021. US 10-year notes slowly moved lower after hitting a high of 1.77% last March, CT10s has traded at a range of 1.55%-1.67% for the last 2 months. To say the market has been consolidating is an understatement. Yields have been trading at a very tight range to mirror US Bond movements. Markets have seen steady demand and aggressive buyers on dips on better inflation outlook and a very accommodative Central Bank.

June Inflation was unchanged at 4.5% and was a spot-on market consensus. This marks the 3rd straight month CPI did not overshoot expectations. Recent numbers provide a much-needed sense of relief for the battered Bond Markets. YTD CPI average is at 4.5% which was lower than the market initially feared. The lockdowns dampened demand that also helped tame CPI, but with the recent re-openings, risks remain. Governor Ben Diokno mentioned a steady decline in CPI as early as the 2nd half of 2021 but there are still risks with rising global commodity prices as well as a stronger US$ move.

Perhaps hidden with all the developing storylines with the Bond market volatility is the movement on the Short-dated tenors. After hitting 2% last March, the 1-year Bills averaged 1.723% in the most recent Treasury Bills auction, an almost 30 bps retracement on the 1-year Bills which provided steady gains in the short dates. The recently issued RTB311(2.375% CPN), which also took a beating and hitting a high of 3.3%-3.375%, is now trading below PAR at 2.36%. The curve steepened as demand for shorter dates grew with liquidity remaining strong and rate hike fears eliminated for this year.

Slowly But Surely

Reflecting on the market moves in the short-dated tenors, SB Money Market Fund has seen a steady improvement over the past 3 months as well. After hitting -0.18% to -0.19% YTD returns at the height of the sell-off, the SB Money Market Fund is currently providing a 0.26% YTD return, a net reversal of up to 0.44% to 0.45% as yields on the shorter dates moved lower. It may go unnoticed as the trajectory is slow compared to the sell-off in March, but returns have been steadily improving for Bonds. Slowly but surely, we expect the trend for short dates to continue for the short to medium term.

Equities Market Report

The PSEi went up by 4.04% in May to close at 6,628.49, arresting two straight months of declines. The market was down below 6,200 intra-month but a two-day spike towards the end of the month reversed earlier losses. After a slow start, the pace of vaccination picked up considerably in May averaging now at around 145k/day, up multiple times from just 35k/day in end-April. Furthermore, the average case count is improving with the 7-day average case count now at around 6,000 from a peak of over 11,000.

Market breadth was positive for the month as 21 out of the 30 index issues declined. Conglomerates were the top performers for the month as institutional investors flocked to these names given their sizeable weights in benchmark indices. AEV was the best index performer up by 13.66%, followed by GTCAP and JGS both up by 12.38% and 8.06%, respectively.

ICT (10.16%) was among the top performers for the month given its strong 1Q2021 results. 1Q volume growth accelerated by 8% and yields jumped by 7%, while EBITDA margins hit an all-time high of 61%. JFC gained 9.60% for the month as gross margins and operating margins in 1Q2021 were nearly at pre-pandemic levels due to significant reductions in operating expenses. Meanwhile, operating losses in Smashburger and CBTL further narrowed vs 4Q2020.

Foreign outflows continued into May with $240mn exiting the market. This brings year-to-date net foreign outflow to $1.47bn. Foreign selling was exacerbated by the MSCI rebalancing which was estimated to be around $200mn to $300mn of outflow. MSCI deletions in AP and MEG saw outflows of $49.1mn and $33.7mn, respectively. Foreign selling was also seen among conglomerates SM, AC, and MPI which saw outflows of $61.5mn, $48.4mn, and $26.6mn, respectively. ICT was the lone PSEi member that saw decent inflows in May of around $29.4mn driven by strong 1Q2021 earnings.

After receiving 4mn doses in May, the government expects to receive 12.5mn doses in June and 15mn to 20mn per month thereafter. More than 5mn doses have already been administered. Although the current vaccination pace is still below the 500k to 1mn shots per day target to reach herd immunity by the end of the year, our optimistic outlook for the market has not changed but has only been delayed by a quarter or two.

The Path of Least Resistance

Despite the recent rally, we continue to believe that stocks are still quite cheap and provide significant upside. 25 out of the 30 index issues are still trading below their respective 10-year average PE multiples. However, buying stocks during this phase of the market cycle is not easy because there is a risk of prices drifting even lower and becoming cheaper. Therefore, investors should have the emotional fortitude to hold onto their investments during this volatile period as they will reap significant rewards down the road. This is the best time to be a contrarian investor as market sentiment is so negative that the path of least resistance is to the upside once positive developments take place.