Philippine investors are preparing for a prolonged period of elevated interest rates and weaker growth, with bond and equity markets showing caution as inflation risks persist and Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. signals that policymakers remain ready to act if price pressures re-emerge.

Jean Olivia De Castro, head of fixed income at Manulife Investments Philippines, said the yield curve is steepening as short-term rates remain supported by the possibility of further BSP tightening, while longer-term yields reflect concerns over inflation and foreign exchange risks.

“This signals that yields are likely near their peak versus early in the hiking phase,” De Castro said, while noting that markets are pricing a pause rather than a shift toward monetary easing.

She said shorter-dated bonds could remain attractive while inflation risks from oil prices, El Niño and second-round effects persist. However, investors should maintain diversified maturities to manage reinvestment risk if rates eventually decline.

On equities, Elle Jamil, head of equities at Manulife Investments Philippines, said the market has remained rangebound over the past six months as stagflation risks weigh on sentiment.

“Corporates with predictable, recurring cashflows and large dividend payouts have been a source of refuge for funds,” Jamil said, adding that beaten-down consumer companies could offer value to investors with longer time horizons.

A higher-for-longer rate environment could continue to weigh on property, airlines, telecommunications companies and highly leveraged infrastructure firms. Banks may benefit from elevated yields, although weaker corporate and middle-market loan demand could offset some gains.

Meanwhile, El Niño, higher oil prices and food costs could further pressure household spending and inflation. Companies with strong brands, dominant market positions and pricing power may remain more resilient, while utilities with pass-through mechanisms could also provide defensive opportunities.

Jamil said sustained month-on-month improvement in inflation, followed by a recovery in gross domestic product (GDP) growth, would be needed to restore confidence in cyclical and rate-sensitive sectors.