MANILA, Philippines — Persisting headwinds from rising inflation and higher borrowing costs will muddy the prospects of local equities in the coming months.

That was the assessment gleaned from First Metro Investment Corp. and UA&P Capital Markets Research’s “Market Call” released Tuesday.

“High inflation rates (both here and in the U.S.) and interest rates loom large in the horizon and have created headwinds for the equities market, which headed south in February,” the report read.

Consumer price growth quickened 8.7% year-on-year in January despite expectations it would peak at the end of 2022. The policy rate currently hover at 6% after the Bangko Sentral ng Pilipinas maintained its aggressive stance against inflation.

Rate hikes typically take 12 to 18 months before it seeps in the economy. Monetary authorities are widely expected to adjust interest rates by 50 basis points in its next meeting.

But analysts at FMIC and UA&P expect the BSP to hike the key policy rate by 25 bps in its next meeting.

That said, the combined threat already dampened the local bourse’s movement this month, succumbing to profit-taking.

Analysts from FMIC and UA&P reckoned that despite signs of renewed confidence from foreign investors, as data showed the all six sectors of the local bourse inched up 3.5% month-on-month in January, selloffs plagued the market by the end of the month. Foreign investors sold P7 billion by then, as opposed to the P6 billion recorded in December.

“This and local inflation in January at a 14-year high provided the basis for local investors to shy away from the market for now,” the report added.

Experts said there is value to be had in shares in the Financial and Holdings indices.

Even then, these experts were bullish on the domestic economy despite these roiling headwinds.

“Most recent economic data suggest that the PH economy may weather the global recession relatively unscathed,” the report read.

They expect painfully high inflation to temper consumer spending but improving employment levels, remittances from overseas Filipinos, and cuts in personal income taxes will likely cushion the impact.

On the other hand, the peso will likely lose solid ground as higher interest rates set by the US Federal Reserve and ballooning trade deficits, which occurs when imports outpace exports, will loom over the horizon.

The weak peso fueled in part the country’s inflation struggles in most of 2022.

That said, the report expects volatility taking over the bond market.

“With local inflation faster at 8.7% in January 2023, likely to average 8.1% in Q1 and may not drop sharply until late H1-2023 due to stubbornly high food prices, with rice still on the rise (Thai 5% broken, up by 21.7% YoY in January), we expect local 10-year bond yields to head towards 6.5% in Q1,” experts said.