05/11/2019
Dear valued customer,
We are pleased to share with you the latest issue of Trend Spotting, your source of market news and forecasts from AXA. Because you are a valued customer, we would like to help you understand the financial market and how it affects your investments with us.
As we head into the fourth quarter, let us go over the economic cycle. Understanding the cyclical nature of the economy could help us identify the differences between each phase, so that we are guided in strategizing our investments accordingly. As a guide, we will also share a framework that aids in pinpointing the current phase of the economy.
But first, let us go over the current state of the economy in the Philippines.
How is the Philippine economy doing?
Economy is measured specifically by two key indicators - Gross Domestic Product (GDP) Growth Rate and Inflation Rate. GDP or Economic Growth, shows how much the country�s GDP increases over a period and measures an economy�s level of spending� which is the monetary value of all spending made by the entire country. Inflation, on the other hand, is the rate of increase in the prices of goods and services available in the economy over a period.
In the Philippines, GDP/economic growth is at 5.5% for Q2 2019, which is one of the highest compared to other Asian entities and higher than the country�s 5.2% average for the last 30 years.
Inflation, so far, is at 3.3% which is significantly lower than the 2018 average rate and within Bangko Sentral ng Pilipinas� (BSP) target of 2-4%.
With a high economic growth and low level of inflation, we can say that the Philippine economy is at the Recovery Phase.
What happens during the Recovery Phase?
Consumer's ability to spend more increases
When GDP/economic growth is high, people want more of what businesses have to offer.
Businesses expand � To keep up with consumer demand, companies/businesses build more factories/stores and hire more employees, among other strategies.
Jobs increase � Business expansion leads to increase in demand for manpower.
Demand increases � With more money going around in the economy, people�s ability to spend for more goods increases. Thus, creating more demand.
Given that the economy behaves in a cycle, even at the Recovery Phase, we cannot expect GDP to grow continuously.
During the Recovery Phase, people expect to be in a healthy growing economy. Thus, there is more incentive to borrow money for purchases. Business also take out debts in order to facilitate expansion. With this, debt levels may rise faster than earnings and comes to a point where these debt levels become unsustainable and the economy suffers a setback, typically in the form of a recession.
Another possibility is that inflation may also go up too soon. The rapid increase in prices of goods and services make it difficult for business and consumers to spend, effectively slowing down economic activity.
Once economic growth is already at risk, central banks would typically step in to intervene. They lower interest rates as lower borrowing costs would encourage spending and we go back to the start of the cycle again.
How do we know we are in the Recovery Phase of the cycle?
The Investment Clock is a framework used to explain the economic cycle. It determines the state of the economy and how to invest during various phases. This framework follows the movement of two main economic factors: GDP/Economic Growth and Inflation.
How do we maximize our investments during the Recovery Phase?
FUND RECOMMENDATIONS
Disclaimer: All information and opinions provided are of a general nature and are for information purposes only. These information and any opinions herein are based upon sources believed to be reliable. AXA Philippines, Metrobank, PSBank, its officers and directors make no representations or warranty, express or implied, with respect to the correctness, completeness of the information and opinions in this document. Investment or participation in the Fund is subject to risk and possible loss of principal. Please carefully read the policy and endorsements and consider the investment objectives, risks, charges and expenses before investing. You should seek professional advice from your financial, tax, accounting or legal consultant before buying. Past performance is not indicative of future performance.
Sources
1. Greetham, Trevor, and Hartnett, Michael. 2003. �The Investment Clock�. Merill Lynch.
2. �Philippines: Economy". 2019. Asian Development Bank. https://www.adb.org/countries/philippines/economy
3. �Summary Inflation Report Consumer Price Index�. 2019. Philippine Statistics Authority. https://psa.gov.ph/statistics/survey/price/summary-inflation-report-consumer-price-index-2012100-june-2019
Reference Number: 2019-110Release Date: Friday, July 5, 2019YEAR-ON-YEAR Philippines The headline inflation in the Philippines decelerated to 2.7 percent in June 2019. This is the lowest inflation recorded since September 2017. Inflation in May 2019 was higher at 3.2 percent and in June 2018, 5.2 .....
