South-east Asian economies, once the hot-spot for foreign investments, had suffered massive outflows of foreign capital after the start of the taper-talk. These markets have stabilized of late after the no-taper shocker by the Fed. Further, Janet Yellen’s nomination as the Fed’s next Chairperson and the ongoing political drama in Washington has raised hopes of no change in the QE program in the near future. (Read: 4 Unbeatable ETF Strategies for Q4)
Looking at the longer-term, I believe that countries that are dependent on ‘hot money’ to finance their external deficits will remain vulnerable to the taper threat. On the other hand, countries with strong external position, sound macroeconomic fundamentals and a stable political environment will outperform going forward. Philippines ETF is worth a look from the longer-term perspective.
Philippine Economy in Focus
According to the IMF, the economy will grow at 6.8% in 2013, backed by solid domestic demand, while inflation will remain low at ~2.8%.
Current administration led by President Aquino has been very effective in combating corruption and tax evasion. Due to rising revenues, the government has been able to keep the fiscal deficit at a low level, despite increased spending.
Thanks to its large educated young English-speaking workforce, Philippines has been growing in popularity as a BPO destination and has emerged as a tough competitor to India. The BPO industry already contributes more than $11 billion to GDP, and is expected to grow to $25 billion by 2016. (See: Emerging Market ETFs—How to pick winners)
Further, remittances from abroad-- accounting for 8 to 10% of country’s GDP--have been instrumental in driving domestic growth. Rising remittances will be supportive for the currency, which though down about 5% against the dollar this year, still looks much better compared with some other emerging markets currencies, which have suffered double digit declines during the same time frame.
With a current account balance at 2.5% of GDP, fiscal deficit at less than 2%, strong growth and foreign exchange reserves at about $85 billion, the country seems in a position to withstand the effects of foreign capital reversal in future.
Investment Grade Rating
Earlier this month, Moody’s upgraded the sovereign credit to ‘Investment Grade’ with a ‘Positive’ outlook. The rating agency took into account “robust economic performance, ongoing fiscal and debt consolidation, political stability and improved governance” in determining the rating. S&P and Fitch had upgraded their rating on the country earlier this year.
Long-term fundamentals for the economy also look good in view of the stable political situation and the popular government that seems committed to accelerate the pace of reforms in the country. (Read: European ETFs--Surge in Popularity)
iShares MSCI Philippines Investable Market Index (EPHE - ETF report)
Launched in September 2010, the product has managed to attract $302 million in assets so far. It holds 41 securities, mainly from the Financials sector. Industrials, Consumer Staples and Telecom also get double digit allocations. The fund charges an expense ratio of 65 basis points. It has returned about 5% year-to-date, compared with a negative return of 1.1% for the broader emerging markets ETF.
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