Philippine equity rally cools as inflation keeps interest rate door open

(Bloomberg) — The rally that propelled the Philippines’ key stock benchmark into a bull market last month is struggling to sustain as the country’s inflation accelerated to a fresh 14-year high.

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The Philippine Stock Exchange index fell as much as 0.7% on Tuesday, extending its decline for a second day. The gauge entered bull territory three weeks ago, as gains culminated in a rise of more than 21% from a September 30 low.

The measure was fixed in a tight range as fears of higher inflation and higher interest rates led to profit taking. Consumer prices rose 8.7% yoy in January, beating estimates including those of the central bank and putting pressure on regulators to keep interest rate hikes going.

“Stocks have gone up too fast, too soon, and a lot of things can still happen,” said Noel Reyes, chief investment officer at Security Bank Corp. helps manage $1.84 billion. It’s not quite ready yet because it’s possible that inflation can still be high. Some are also cashing in since the rally was strong.”

Reyes sold shares during January’s rally on anticipation of setbacks as he expects inflation to remain high in the first half of the year before easing in the second half. He sees the index closing 2023 at 7,800, up 19% from the end of 2022.

“Volatility will continue until the inflation trend is under control,” said Cristina Ulang, director of research at First Metro Investment Corp. While a 50 basis point rate hike should already be priced in for this year, she said stocks are still likely to see some easing in profit-taking on rate hikes.

She has a more conservative year-end target of 7,500 for the index as interest rates will remain high and restrictive, which will limit gains and economic growth.

Still, analysts say there are buying opportunities, particularly for stocks trading at attractive valuations and for large-caps. “Buy on dips and sell on rallies. Focus on value,” said April Lynn Lee-Tan, director of research at COL Financial Group Inc.