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Philippines Interest Rate Unchanged: ETFs in Focus

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The Philippines central bank left its benchmark interest rate intact at 3%, in line with market expectations. The premier banking authority expects inflation to average 3.2% this year and the next, which is within their target band of 2-4%.

Economic Data

Philippines witnessed impressive economic growth in the second quarter of 2017. Per the National Statistics Agency, GDP grew 6.5% year over year in the second quarter compared with 6.4% in the first quarter. It also beat a Reuters forecast of 6.2% (read: Philippines GDP Up In Q2: ETFs in Focus).

Consumer prices increased 3.1% year over year in August compared with 2.8% in July. This was above market expectations of a 3% increase. Moreover, it expanded 0.3% on a monthly basis, same as previous month and above market expectations of a 0.2% increase.

Risks Involved

Foreign investment plays a pivotal role in determining the economy’s success. However, the country’s president Rodrigo Duterte's deadly war on drugs may cause foreign investors to flee. Last month, Philippine police killed 32 people in a series of drug raids. This war against drugs has made the country’s economic environment quite uncertain.

Duterte’s tax reform bill is expected to give a boost to tax revenue in order to fund his goals of infrastructure expansion. The administration has promised to increase infrastructure spending to 7.4% of GDP by 2020.

The senate issued a hugely modified version of the bill earlier this week. However, the markets seem to be optimistic now, owing to the progress in the tax reform, which led stocks to rally. The Department of Finance postponed the submission target of the second reform bill from October to January, as it focuses on getting it passed on time.

Let us now discuss the most popular ETF focused on providing exposure to Philippine equities.

iShares MSCI Philippines ETF (EPHE - Free Report)

This fund seeks to provide exposure to Philippine stocks primarily in the large cap segment.

It has AUM of $179.98 million and charges a fee of 64 basis points a year. From a sector look, Real Estate, Financials and Industrials are the top three allocations of the fund, with 24.6%, 23.7% and 23.2% exposure, respectively (as of Sep 20, 2017). Ayala Land Inc, SM Prime Holdings Inc and BDO Unibank Inc are the top three holdings of this fund, with 10.1%, 9.1% and 7.7% exposure, respectively (as of Sep 20, 2017). The fund has returned 15.0% year to date but lost 2.97% in a year (as of Sep 21, 2017). It currently has a Zacks ETF Rank #5 (Strong Sell) with a Medium risk outlook.

We will now compare the fund’s performance to a broader South East Asia based ETF, ASEA.

Global X Southeast Asia ETF (ASEA - Free Report)

This fund provides broad exposure to the five members of the Association of Southeast Asian Nations, Singapore, Indonesia, Malaysia, Thailand, and the Philippines. It is appropriate for those looking for a diversified exposure to South East Asia.

ASEA is less popular with AUM of $14.12 million and charges a fee of 65 basis points a year. From a geographical perspective, the fund has 30.45% exposure to Singapore, 22.29% to Malaysia, 21.15% to Thailand, 19.67% to Indonesia and 6.44% to Philippines (as of June 30, 2017).  Financials, Telecommunication Services and Industrials are the top three sectors of the fund, with 45.92%, 14.94% and 8.12% allocation, respectively (as of June 30, 2017). DBS Group Holdings Ltd, Oversea-Chinese Banking Ltd and United Overseas Bank Ltd are the top three holdings of the fund, with 7.1%, 7.0% and 5.7% allocation, respectively (as of Sep 21, 2017). The fund has returned 10.4% in a year and 21.7% year to date (as of Sep 21, 2017). ASEA currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Below is a chart comparing the year-to-date performance of the two funds.

Source: Yahoo Finance

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