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Philippines ETF Rebounds: Can the Rally Continue?

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Philippines ETF iShares MSCI Philippines ETF (EPHE - Free Report) has gained 8.3% in the past month (as of Jul 15, 2019) versus 4.3% of the S&P 500 and 4.1% of the all-world ETFiShares MSCI ACWI ETF (ACWI - Free Report) .

The bulls took control of the Philippine stock market, helping the local market gauge cross 8,300 and close at a 16-month high on Jul 15. This also marked the Philippine Stock Exchange Inc.’s (PSEi) best single-day performance in 10 months. The gauge jumped more than 22% from last November’s low, ushering in a bull market.

Will the Rally Continue?

The bull run of Philippine stocks is likely to continue on “tailwinds of stronger corporate earnings, cooling inflation and continued monetary stimulus,” per Bloomberg. Peso has been among the best-performing currencies of the region. A dovish Fed has been instrumental in driving the peso rally.

The market participants are wagering on policy easing by the Bangko Sentral ng Pilipinas (BSP). Chidu Narayanan, economist at Standard Chartered Bank, expects BSP’s Monetary Board to cut benchmark rates in August and September due to cooling inflation, slower lending growth and weaker economic expansion, per the source. Inflation eased to 3.6% in the first five months despite a slight rise to 3.2% in May from 3% in April.

The central bank of Philippines cut its key overnight reverse repurchase facility rate by 25 bps to 4.5% on its May 5, 2019 meeting. It was the first rate cut since May 2016, reversing a 175-bp rate hike last year. Rising inflation and falling peso had led to last year’s rate hike, weighing on Philippine stocks (read: Philippines ETF in Focus Post Fifth Rate Hike for the Year).

Foreign investors poured more than $432 million into Philippines-based equity funds this year. This was against $1 billion of outflows from the nation’s stocks in 2018 — the biggest withdrawal in three years, according to data compiled by Bloomberg.

With the economy seeing the weakest quarterly growth rate in the first quarter of this year since third-quarter 2014, there are chances that the central bank would go for more rate cuts, should the need be. In such a case, the Philippines market is expected to rally. Against this backdrop, we highlight the pure-play ETF targeting Philippines.

EPHE in Focus

The fund tracks the MSCI Philippines Investable Market Index and comprises 40 holdings. Sector-wise, industrials (30.3%), real estate (27.2%) and financials (19.1%) have a double-digit allocation each.

The fund has company-specific concentration risks, with Ayala Land Inc (1093%) and SM Prime Holdings Inc (10.84%) taking the top two spots. The fund’s AUM is $243.0 million and expense ratio is 0.59%. It carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Asia-Pacific (Emerging) ETFs here).

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