The heightened Middle East tension can impact the global economy through spikes in commodity prices. The latest updates signal that a further escalation of last week\u2019s attacks is unlikely thus, restoring some calm into the markets. <\/p>\n\n\n\n
Brent crude oil spot has corrected to below US$87\/bbl after hitting a high of US$90\/bbl in reaction to the Israel\u2019s strike on Iran. Gold also corrected after hitting a new high at US$2,391\/oz. The peso tumbled 0.75% to P57.63\/USD, a new 52-week low for the currency.<\/p>\n\n\n\n
The immediate reaction is that the latest developments in the Middle East could only worsen the Philippine inflation (as commodity prices rise alongside a weakening of the local currency). As it is, the BSP has already turned more hawkish even prior to last Friday\u2019s escalation as upside risks to inflation have worsened as food and transport prices remain elevated. <\/p>\n\n\n\n
The BSP has signaled that it could delay the anticipated rate cuts into next year while Finance Secretary added that the rate cuts could be delayed should the peso weaken past the record low of P59\/USD. Our own forecast is for at least a 50bps (instead of 75bps) rate cut later this year.<\/p>\n\n\n\n
Our View: <\/strong>Amidst elevated inflation and heightened geopolitical risk, we suggest focusing on defensive stocks while still favoring quality names with cyclical recoveries over the short term. Our preference: SM, MBT, JFC, ALI, ICT, AP and MWC. Note too that our index target of 7,300 for the year remains.<\/p>\n\n\n\n Just to add: With interest rates likely to stay higher for longer, the outperformance of the Banks will likely be sustained over the near term (positive for BDO & BPI). The anticipated switch from Banks into Property which is premised on easing rates will be deferred. Malls will continue to do well but the recovery of the residential segment will be weighed down by extended higher rates (we like ALI and RLC). <\/p>\n\n\n\n The recovery of the Consumer sector will take longer as consumer sentiment continues to be dampened by higher inflation and interest rate. Thus, we continue to focus more on the staples over discretionary (URC and MONDE).<\/p>\n\n\n\n