Investment climate to improve by July

THE SECOND HALF of the year is seen to be a better period for investors of the emerging markets as geopolitical risks are expected to abate by then, ING Bank officials yesterday said.

“[Investing] may somehow be choppy for investors now, but we expect some positive developments to happen over the next couple of months. Our central scenario is not for a full-blown Middle East crisis, we expect that the geopolitical clash would be resolved by then,” Paul Joseph M. Garcia, head and chief investment officer of ING Investment Management, said in his speech during the Client Market Briefing of ING Investment Management Philippines.

“Commodity prices are expected to ease by then as the central bank tightens its interest rate, better weather conditions are also expected and an ease in oil prices which is mainly driven by the geopolitical tension in the Middle East is expected to abate in the second half,” Mr. Garcia added.

Prices of oil have increased due to the civil unrest in the Middle East and North Africa. The Energy department said the Philippines consumes an average 48 million liters of fuel a day, 81% of the country’s crude oil supply is coming from the Middle East.

John Woods, senior analyst of Macquarie Capital Securities, Hong Kong, said “the rise in oil prices is negative for the equity market’s growth,” but stressed that, the demand for equities in emerging markets could balance off the negative effect.

The PSEi gained on the sixth consecutive day of trading as it rose by 0.84% or 33.08 points to 3,959.94 yesterday. Analysts said that despite a retreat in the Dow Jones and continued rise in oil prices, the local stock exchange’s growth may be attributed to positive corporate earning results.

“Pressure in oil prices also leads to inflation, but as the central bank tries to manage the exchange rates and if it raises its interest rates, it can manage inflation,” Mr. Woods said.

Inflation in February settled at 4.3%, surpassing the central bank’s 3%-4.1% forecast for the month.

BSP Governor Amando M. Tetangco, Jr. earlier said February’s inflation result has narrowed the possibility for the central bank to keep its policy rates steady.

The Philippines is the only major Asian economy not to have raised its key rates since the end of the global financial crisis, aided by benign inflation in 2010.

Its overnight borrowing and lending rates have been unchanged at 4% and 6%, respectively, since July 2009.

Mr. Woods added that the increase in interest rates could bring money into the region, including the Philippines, as well.

For his part, ING Bank senior economist Jose Mario I. Cuyugkeng said inflation through the elevated food and oil prices is one of the market risks for investors.

“Inflation would push yields to move up, which means your bond portfolio and unfortunately your mark-to-market value is quite negative, but it is an opportunity for long-term investors invest in higher yielding assets,” he said.

He said a second risk to the local market is the debt problem in the euro zone. “The impact of EU debt problems in the Philippines, however, have been more muted because investments by the country in EU is small. But it would provide some price volatility for the market,” Mr. Cuyegkeng said.

“The last is the US interest rate risk, the data coming from the US is surprisingly on the upside and the past three or four months, economists have revised their forecast,” he added.

But with the economic fundamentals of the country, the Philippines is quite strong, Mr. Cuyegkeng said.

“The deficit which turned into a surplus is seen to continue on the back of net inflows from overseas workers and revenues from IT (information technology) and BPO (business process outsourcing) companies and impact of foreign direct investments and portfolio investments,” he said.

The government incurred a deficit of P314.4 billion last year, P10.6 billion lower than the P325-billion cap. –ANN ROZAINNE R. GREGORIO, Reporter, Businessworld