By Bob Johnson :
The bold headline across the front page of the print edition of
Inquirer" Thursday morning, April 25, read:
" Moody's: PH A Rising Star"
The article continued to say that the country was "poised to
record one of the fastest rising growth rates in the world."
This article will set the current and forecast economic growth
in the context of political changes, and describe actionable
The Philippines is an Asian island nation of 97 million people,
making it the 14th most populated country in the world. However,
until recently it was known as the "poor man of Asia," the gains of
its neighbors far outdistancing it by most measures. In the past if
it was spoken of in the superlative often the comment was about
Imelda Marcos's shoe collection or the corruption of the Marcos's
two decade long rule. Though that regime ended with the rise of the
"People Power" campaign of Corazon Aquino who became president for
six years starting in 1986, the corruption and dysfunction at all
levels of government was deeply ingrained in the system. The
Philippines was a chronic underachiever. As a visitor here for the
last 15 years my observation was that nothing ever changed. And
then, surprisingly, it did.
President Benigno Aquino III, often referred to by the acronym
loving Filipinos as PNOY… P for president and NOY from Noy-Noy a
childhood nickname, took office June 30, 2010, and his term will
continue until 2016. I have noticed more cranes on the skyline of
metro Manila, the school program has been increased from 10 years
to 12 and 100s of classrooms have been built. More young adults are
finding work in the growing business services outsourcing industry
as well as in the growing tourist industry. As was reported by the Inquirer ,
Moody's Analytics, meanwhile, highlighted the benefits of the
anti-corruption agenda of the Aquino administration. It said the
reform programs of the current administration had significantly
improved business sentiment in the Philippines.
"The government's 2011-2016 development plan provides a
five-year blueprint for growth and development, providing
transparency, predictability and accountability. The crackdown on
corruption and encouragement of local and foreign investments, in
particular, have worked well," it said.
The Philippine economy grew 6.6% in 2012, achieving this gain in
spite of the unimpressive United States economy, the Eurozone
problems and the slackening demand in China. The important factors
included increased private investment, more government spending and
growing consumer demand. The forecast for 2013 is between 6.5% and
7% GDP growth. Moody's sees the same level of growth in 2014 and if
the favorable economic trends continue in the Philippines, the
growth rate could reach 8% by 2016. This makes the country one of
the "brightest parts of a generally gloomy global picture."
It is not only Moody's that sees continuing growth in the
country. "Standard & Poor's has raised its growth forecast for
the Philippines for this year from 5.9 to 6.5 percent," the Inquirer also noted. At the same time,
S&P said the economy was expected to post robust growth of 6.3
percent in 2014.
A frequent concern when investing outside one's home country is
currency risk. However, the Philippine Peso is strong against the
US dollar. Last year it gained 6.5% against the dollar, ranking 9th
in the world of performers vs. the American currency. It is little
changed YTD in 2013 and forecasts indicate continued strength
against the dollar.
(click to enlarge)
The Philippine Stock Market
The Philippine Stock Exchange Index, a weighted average of 30
stocks known as the PSEi, crossed the 6000 line in early January
and reached the 7000 mark last Monday, up over 23% year-to-date.
This is on top of 32.9% growth last year, making it one of the
world's top markets in 2012. The 5-year chart, below the 1 year
chart, is nearly as impressive.
(click to enlarge)
(click to enlarge)
One place the optimism shows is in the P/E of the index, which
stands at 26.5, perhaps not an inappropriate number for this fast
growing collection of stocks.
A broad and representative sample of the Philippine market may
be purchased by buying the iShares MSCI Philippines ETF ( EPHE ).
The fund is $500,000,000 in size and has a 0.60% expense ratio.
The beta of the fund is 0.73 when compared to the S&P 500. The
12-month yield is 0.65% and the current 30-day SEC yield is 0.53%.
I believe owning this fund is the best way to participate in
This country fund consists of 41 stocks, the largest 20 in this
market-cap-weighted index fund comprising 82% of the total dollar
holdings. The market is heavily weighted toward the Financial
Sector, however, a large portion of these firms are involved in
real estate development and management, non-banking or other
traditional financial services. These companies had a very good
year in 2012 and that is continuing this year.
(click to enlarge)
(click to enlarge)
While I feel that individual Philippine stocks are not the best
choice for the average US or Canadian investor, I provide below
some possible candidates for evaluation by those who feel
otherwise. The Philippine Long Distance Telephone Company, often
referred to as PLDT, is traded on the NYSE as an ADR ( PHI ). About 25 other
Philippine firms are traded over the counter in the US as either
sponsored or unsponsored ADRs. I believe that many of them are a
lower class of ADR, which does not require them to do SEC filings,
nor does it offer them the opportunity of major exchange
The below table lists the PSEi stocks (30 stocks similar in
concept to our Dow Jones 30) with a red "i " beside each stock that
is one of the iShares EPHE top 10 holdings. This list is sorted by
2012 return.(click to enlarge)
The many risks involved in investing in emerging nations are
often summed up as country risk. In general, even with all the
advances being made by the administration of President Aquino, the
Philippines is still a relatively high-risk country. The rule of
law is not as strong as it probably will be in the future; one
often settles for the customary rather than the ideal. The
institutions, which guarantee individual and corporate rights, have
a history of being weak and corrupt. At best the courts and
administrative systems are highly politicized.
The physical infrastructure is also lacking. Manila, the capital
city, has such poor drainage that even two or three days after
heavy rains the streets can be flooded with knee deep water. Power
outages are common everywhere in the country, but in no place are
they as bad as on the southern island of Mindanao. Rotating 8 hour
blackouts are the norm this summer.
The Philippines remains a very poor country for the 28% of the
population living below the poverty line, a line which is in a very
different place from the line with the same name in America.
Yesterday's optimistic front-page headline about economic progress
was followed by one today which cried, "Poor Get Poorer." Indeed,
the percentage of people living in poverty is almost exactly the
same as it was in 2006.
However, I see more optimism and hope here, along with real
progress, than I have ever seen in the past. The Filipinos are a
happy people and a good people. For the first time in many years
they have the good and capable leader they deserve. I am most happy
to participate in their good fortune by virtue of a position in the
iShares Philippine Fund, EPHE.
Disclosure: I am long [[EPHE]]. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it (other than from Seeking Alpha). I
have no business relationship with any company whose stock is
mentioned in this article.
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