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Philippines ETF in Focus Post Fifth Rate Hike for the Year

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The Philippine Central Bank increased the overnight reverse repurchase rate by 25 basis points to 4.75%, marking the highest rate rise since 2009. This was the fifth rate hike for the year and happens to be the most aggressive tightening action to be seen in Asia. Seven out of the 13 analysts in Reuter’s poll expected the same for the Nov 15 policy decision meet. This rate hike was preceded by four successive hikes since the month of May, including back-to-back 50 bps increases in August and September.

 Why the Move?

Philippine import reached an all-time high in September, taking the national trade deficit to its steepest level in nine months. Per Philippine Statistics Authority (PSA), the hefty import bill was caused due to purchases of foreign capital goods to be used in President Duterte’s infrastructure spending plans. Philippines recorded growth at an annual rate of 6.1% in the third quarter, the slowest pace in three years. The dip in economic activity was caused due to rising inflation and interest rates, which curbed consumers spending appetite — recorded at a four-year low.

Inflation was 6.7% last month. The recent fall in oil and rice prices will cool down inflation. However, the recently approved hike in wages and transport costs in Manila will keep price levels under pressure. The central bank has raised its average inflation rate forecast for 2018 to 5.3% from the previous estimate of 5.2%. However, the central bank has forecast inflation to return to the 2-4% target range next year, estimating  price gains to average 3.3% in 2020 (read: TigerShares Launches First U.S. Listed ETF:TTTN).

This move, seen as proactive by many, was taken to counter the escalated trade tensions between Washington and Beijing alongside a volatile state of global markets. The policy tightening was also the result of a hawkish Fed and a stronger greenback. Though Philippine peso is down more than 5% against U.S. dollar this year, it has recovered well recently and happens to be the best performing emerging market currencies in the past month (read: Fed Meet Signals December Rate Hike: ETFs That Gained).

Are More Hikes in Store?

The recent spike in wages and transport fares, and a bulging trade deficit could cause more rate hikes in the future.

ETF in Focus

iShares MSCI Philippines ETF (EPHE - Free Report) has lost nearly 2.2% over the past month (as of Nov 15). Below we highlight the ETF (see: all the Asia-Pacific (Emerging) ETFshere):

EPHE

The fund tracks the MSCI Philippines Investable Market Index and comprises 43 holdings. Sector wise, real estate (26.3%), financials (26.1%) and industrials (21.3%) have a double-digit allocation each. The fund’s AUM is $128.1 million and expense ratio is 0.62%

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