HSBC strategists said the Philippines is showing signs of stagflation, with Gross Domestic Product growth slowing as inflation accelerates to the highest rate in ASEAN. In 1Q26, output expanded 2.8% year on year, its weakest pace since 2009 when excluding the Covid-19 period. They linked the drag to falling public capital disbursements and uncertainty around government outlays, which has encouraged households and businesses to curb spending, pushing savings higher and investment lower.<\/p>\n
The firm added that weaker demand is feeding into a softer labour market, with unemployment rising above 5%. At the same time, headline inflation is running at 6.8% year on year, keeping price pressures elevated as activity cools. HSBC expects growth to remain below potential in 2026\u20132027, while pointing to scope for a faster recovery in Philippine financial markets once the energy shock fades, supported by a prudent fiscal stance and targeted welfare measures.<\/p>\n
Given the current economic data, we see the Philippines facing significant stagflationary pressures that will guide our trading strategy in the coming weeks. The combination of slowing growth, now at a post-pandemic low of 2.8%, and the highest inflation in ASEAN at 6.8% creates a negative outlook for domestic equities. We are therefore positioning cautiously by purchasing put options on the PSEi to hedge against a further decline in the main index.<\/p>\n
This environment of high uncertainty, driven by weak public spending and a softening labor market where unemployment has now crossed 5%, suggests heightened market volatility. Historically, such periods lead to sharp price swings, similar to the market turbulence seen during the 2022 global inflation shock. To capitalize on this, we are increasing our long volatility positions through index straddles, which will profit from large movements in either direction.<\/p>\n
The Philippine Peso is particularly vulnerable as capital seeks safer havens amid poor domestic fundamentals. With the currency already showing weakness and testing multi-year lows against the dollar, we are building short positions through currency forwards and options. The central bank’s inability to support growth while needing to fight inflation puts sustained downward pressure on the PHP.<\/p>\n
With inflation remaining persistently high, we do not expect the Bangko Sentral ng Pilipinas to cut interest rates anytime soon. This “higher for longer” rate outlook is bearish for fixed-income instruments. Consequently, we are using interest rate swaps and shorting bond futures to position for continued pressure on government bond prices.<\/p>\n
However, we recognize the potential for a swift market rebound once the current energy shock subsides, as the underlying fiscal management has been prudent. While our immediate stance is defensive, we are beginning to scale into long-dated call options on oversold, high-quality stocks. This provides low-cost exposure to a potential market recovery in late 2026 or early 2027.<\/p>\n\n\n\n