Philippine Markets Newsletter

PH Monday Macro: IMF’s 2023 global economic growth forecast has dampened investor confidence…this indicator says a recession isn’t on the horizon

October 24, 2022

The Philippine stock market, as represented by the Philippine Stock Exchange index (PSEi), recently hit 2-year lows on the back of both domestic and global inflation concerns. Though the index price level has recovered, it’s still below the low from 3 months ago.

Many believe the worst is not yet over for the global economy, as reflected in the 2023 economic growth forecast of the International Monetary Fund (IMF). With this slower growth and the appearance of new COVID-19 variants, will the more pessimistic outlook mean another recession is right around the corner?

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It’s easy to get caught up in all the doom and gloom news about the economy when inflation rate in the Philippines steadily climbed from 3% in February 2022 to 6.9% in September 2022. Consumers have been feeling the burden of higher cost of goods, either in the form of higher prices or in fewer units of an item per Philippine peso.

The combination of this high inflation rate, slower growth expectations, and weaker Philippine peso against the U.S. dollar has investors concerned about the country sliding back into a recession, with the worst supposedly not yet over.

While those indicators are commonly used to gauge the economy’s health, we should remember that recessions are normally preceded by credit events. As such, it is important to take a look at government bonds.

Government bonds are typically seen as representative of the “risk-free rate” and provide strong insight into market expectations for future economic growth. To better understand what the yields are saying, they need to be plotted out over time to form a yield curve. Furthermore, they need to be looked at in terms of spread, or the difference between two bond yields over time.

When long-term interest rates are higher than short-term rates, this creates a positive or normal yield curve. A positive curve reflects a normal economy, as a loan that comes due later should be riskier than one that is paid off sooner. This also signals that the market expects economic growth to build on itself in the future.

Meanwhile, an inversion of the yield curve has consistently signaled a recession, which is when short-term rates are higher, or appear riskier, than in the long term. An inverted curve means the market is expecting that at some point in the future, growth will significantly slow down for a protracted period.

While most pundits have looked at the 10-year yield curve vs the 2-year yield curve to predict a recession, a more accurate read can be found using the 3-month yield versus the 10-year yield.

Here, we see the spread between the 10-year bond yield curve and the 3-month bond yield curve remains comfortably wide, versus the tight spread in 2020-2021.

So even with all the fears surrounding both local and global economies, investors should not be worried about another recession in the near future. If anything, with the Philippine stock market at its 2-year lows, this should provide another opportunity for investors to add to their positions via peso cost averaging.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms..

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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