The Twilight of Low Interest Rates
June 15, 2018
The US Fed raised its federal funds rate for the second time this year with two more seen until year end, and this signaled the end of the low interest rate environment that was mainly fostered from November 2008 and ended in October 2014. After a decade, the string of QEs finally jump-started the US economy prompting the Fed to soon end its bond buying program. Even the EU is looking at ending theirs by year-end.
In the Philippines, the low interest rate environment stimulated multiple sectors mainly through debt-fueled consumer spending of cars, condos, clothing, iPhones and others. It sparked a property and infra boom from roads to townships, rail, telecom networks and others. Airport proposals are plentiful, and new power plants are sprouting to support the around 6% quarterly Philippine GDP growth.
The PSEi likewise reached an all-time high of 9,078 just last January 29. Although this is generally seen as an accomplishment, it was a confirmation to us of irrational exuberance. After that, the PSEi has tumbled to 7,530 as of this time. Assuming all things equal, 9,078 can be reached again and justified if the PH10YTN rate slides down to 4.525% or if the PSEi EPS surges by 24%. The former is unlikely, while the latter will take at least four years.
Our monitoring of interest rates of fixed-income securities has led us to wait for firm ground. The PSEi still has a ways to go even at 17% down from the peak. We are still confident of the Philippine economy and Philippine stocks. The former is running at around 6% per quarter in GDP growth with debt to GDP ratio at 42%. There are also a host of prospects for Philippine stocks, and they have performed well with a good mix of opportunism and prudence over the years.
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