Philippines' Typhoon: What It Means For Economy, ETF


With recovery efforts still underway in the aftermath of the devastating Typhoon Haiyan, some estimate the death toll at 10,000 and the missing at 2,000 and pin the total cost to the Philippine economy at about $14 billion. But the impact on the stock market , which has been in a bear market for five months, so far has been minuscule.

IShares MSCI Philippines ( EPHE ) shed 3% last week as it trended lower for a third straight week. As usual in the aftermath of all natural disasters, investors have to see whether international aid and government rebuilding efforts will juice corporate earnings and sales enough to revive the stock market.

For what it's worth, Ned Davis Research's studies of the Dow Jones Industrial Average show the index tended to post larger returns on average in the one, three, six and 12 months after a hurricane.

A natural disaster can create negative market sentiment in the short run, such as Japan's market after the 2011 earthquake and tsunami.

"However, rebuilding efforts can be good for the country's companies as a lot of resources are needed to rebuild," said Tony Welch, senior global analyst at NDR, based in Venice, Fla. "We see this in a lot of our work, for instance our war studies, terrorist studies.

"What's good for Wall Street is not necessarily good for Main Street," he added.

Neena Mishra, director of ETF Research at Zacks Investment Research in Chicago, believes EPHE is positioned to rebound longer term because of its strong economic growth potential and the government's commitment to supercharge reforms.

The Philippines has a trade surplus, as measured by the current account balance, that amounts to 2.5% of its gross domestic product. It's a healthy sign that more money flows into the country than out of it. Filipinos living abroad and sending money to family contribute more than $11 billion to GDP, according to Mishra.

Remittances are expected to more than double to $25 billion by 2016. In addition, the Philippines is gaining on India as the hot destination for business process outsourcing, owing to a large, educated, English-speaking workforce.

After leading all global ETFs with a 48% return in 2012, iShares MSCI Philippines has slipped 3% year to date. It has outpaced its benchmarkiShares MSCI Emerging Markets Index ( EEM ), down 7.6% year to date, but has severely laggediShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, which has returned nearly 15%.

EPHE in mid--June officially fell into a bear market, as defined by a 20% correction from a 52-week high. It's been consolidating below its 200-day moving average ever since. It would have to rise 10% to break above that key technical indicator and confirm a new uptrend.

Even after its pullback, EPHE trades at expensive valuations compared with EEM and EFA. It sports a hefty price-to-forward earnings ratio of nearly 19 vs. 11.5 for EEM and nearly 15 for EFA. It also trades at a premium based on price-to-book, price-to-sales and price-to-cash flow ratios while paying a smaller dividend.

"If, after this enormous human tragedy, the market continues to drop, we believe its valuation will become more attractive," Leila Heckman, an international portfolio manager at the Roosevelt Investment Group in New York, said in an email. "It is still early to have a definitive word on what the effect of the typhoon might be. However, it's possible (it) will have a positive effect on GDP forecasts."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , ETFs

Referenced Stocks: EEM , EFA , EPHE

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