Amid uncertainty hounding the global economy, asset management firm ATR KimEng Asset Management Inc. (ATRAM) said investing in bonds gives more upside than investing in stocks.
Allesandra Araullo, ATRAM chief investment officer, said this is amid an environment wherein interest rates are seen to remain elevated for some time — as central banks, particularly the US Federal Bank, raise rates to contain the inflation.
While the runaway inflation of 2022 is starting to taper off based on the latest available data, inflation is expected to still stay elevated dampening the chances of the US reversing its track of raising rates, which other central banks use to anchor their respective rate hikes, Araullo noted.
“For the year 2023… (we’re) expecting another 25 to 75 basis points hike (while) 2024, 2025 remains a lot more uncertain. That tells us that definitely a pivot is not quite in the cards as far as policymakers are concerned. This hasn’t been a secret. It’s been well telegraphed,” said Araullo in an ATRAM market outlook talk over the weekend.
“The problem is the markets are trying to get ahead of things. Obviously, markets price in things before they actually happen. So our view for global equities is that any strength – we just saw it in the first week of January – any strength in price action is an opportunity to bring it down to an overweight, tactical position,” she added.
Raising the chances of an extended period of high inflation is the reopening of China, whose appetite for commodities like metals and oil can influence inflation on the commodity side to remain high, forcing monetary officials in countries like the Philippines to keep a hawkish monetary stance, Araullo said.
ATRAM said the best case for the global economy is a US recession, mild or moderate notwithstanding, that will significantly impact the prospects of the financial markets in emerging economies like the Philippines.
In the Philippines’ case, the “twin deficit” in the current accounts and the government’s fiscal position contribute to putting the local bonds and equities market at a “precarious footing,” noted Araullo.
“Whenever you have a strong dollar or rising interest rates, rising dollar interest rates, it puts us, the country, in a position that is between a rock and a hard place. So that persistent current account deficit position makes our assets, peso assets very vulnerable to external factors. And that is why we have been seeing foreign fund flows into our market,” she said.
“Secondly, you have on the fiscal side government spending, the strong commitment to spend is happening at a time when there is tight fiscal space. So meaning there is high public debt to GDP (gross domestic product). And so that means elevated fiscal deficit to GDP. While we are in need of that fiscal spending, it is also coming at a time when we’re stretched on the macro side. So those twin deficits are working against (us). And in the scheme of things, emerging markets, in general, are not well positioned in the event of severe recession in the US which remains to be seen,” she added.
Araullo, however, said the environment still offers investing opportunities both in the fixed income and stock markets.
The Philippines still benefits from the windfall of reopening in 2022 which helped the local equities market to keep its loss to 7 percent compared to the US’ 19 percent, she said.
“That outperformance is a function of the margins or the earnings that the Philippine corporates are able to deliver, including those that really benefited from the reopening, the tourism, the airlines,” she said.
Araullo pointed out the momentum this year is slowing down with new catalysts acting as headwinds, thus it remains to be seen how companies will adjust to such an environment.
“It’s a push and pull dynamic. And we think that, generally speaking, equity risk requires a higher premium, meaning I will only take on equity risk exposure if the potential upside is a lot higher than what we’ve seen in the past. And that’s just not the case at this juncture which is why we’re really more biased towards fixed income,” she said.
