Despite attractive PSE valuations, lingering macro concerns — primarily inflation continue to keep investors (especially foreign) at bay. Rice and oil are among the key commodities that drive local inflation. These two commodities combined account for around 21.5% of the local CPI basket (rice at ~9% and gas\/fuel at ~12.5%). Add to that
another 7% as indirect impact of gas\/fuel via transport.<\/p>\n\n\n\n
The Philippines is now the largest importer of rice globally and we import majority of our oil consumption (up to as much at 70+% now from 50+% before). <\/p>\n\n\n\n
The good news: is that rice price has been coming off, down by more than 7% year-to-date (YTD), as concerns about the potential impact of El Nino to rice supply are mitigated by improved local production (yield was at record high last year) and increase in importation which assure the country of enough supply at least until the next harvest season. The recent agreement with Vietnam for additional rice supply for 5 years should help ease concerns about supply shocks.<\/p>\n\n\n\n
The bad news: Oil prices are creeping up again (Brent is up over 15% YTD). Bloomberg\u2019s Global Insight talked about the potential adverse effect of the recent Ukraine drone strikes and Syria strikes on oil supply (i.e., the former have taken 11% of Russia\u2019s oil refining capacity offline while an escalating Middle East conflict could have a significantly greater impact on global oil supply). <\/p>\n\n\n\n
After 15 months of ample supply and strong demand balanced the price of crude around $85 a barrel, lost Russian supply and heightened geopolitical risk in the Middle East mean prices are rising again. Since March 12, Brent crude has risen around 8%, or $6 a barrel. Their model attributes almost all of that price gain to supply losses.<\/p>\n\n\n\n
Our View: <\/strong>As we have been saying, we are \u201cnot out of the woods yet\u201d in terms of inflation outlook. The drop in rice price is more than offset by higher oil prices which means inflation could remain flat (at best) or even rise again. Lower food prices help in consumption recovery (especially for discretionary items) but this could be weighed down by pressure coming from higher oil prices. <\/p>\n\n\n\n In terms of the market, this means the Consumer sector will likely continue to lag as any potential for a sector-wide recovery could be pushed back by inflation concerns. The sector\u2019s operating leverage (our key angle for the sector this year) will only kick-in once input costs ease further and inflation slows down sustainably.<\/p>\n\n\n\n