The bold headline across the front page of the print edition of the "Philippine Inquirer" Thursday morning, April 25, read:
"Moody's: PH A Rising Star"
The article continued to say that the country was "poised to record one of the fastest rising growth rates in the world."
This article will set the current and forecast economic growth in the context of political changes, and describe actionable investing opportunities.
The Philippines is an Asian island nation of 97 million people, making it the 14th most populated country in the world. However, until recently it was known as the "poor man of Asia," the gains of its neighbors far outdistancing it by most measures. In the past if it was spoken of in the superlative often the comment was about Imelda Marcos's shoe collection or the corruption of the Marcos's two decade long rule. Though that regime ended with the rise of the "People Power" campaign of Corazon Aquino who became president for six years starting in 1986, the corruption and dysfunction at all levels of government was deeply ingrained in the system. The Philippines was a chronic underachiever. As a visitor here for the last 15 years my observation was that nothing ever changed. And then, surprisingly, it did.
President Benigno Aquino III, often referred to by the acronym loving Filipinos as PNOY… P for president and NOY from Noy-Noy a childhood nickname, took office June 30, 2010, and his term will continue until 2016. I have noticed more cranes on the skyline of metro Manila, the school program has been increased from 10 years to 12 and 100s of classrooms have been built. More young adults are finding work in the growing business services outsourcing industry as well as in the growing tourist industry. As was reported by the Inquirer,
Moody's Analytics, meanwhile, highlighted the benefits of the anti-corruption agenda of the Aquino administration. It said the reform programs of the current administration had significantly improved business sentiment in the Philippines.
"The government's 2011-2016 development plan provides a five-year blueprint for growth and development, providing transparency, predictability and accountability. The crackdown on corruption and encouragement of local and foreign investments, in particular, have worked well," it said.
The Philippine economy grew 6.6% in 2012, achieving this gain in spite of the unimpressive United States economy, the Eurozone problems and the slackening demand in China. The important factors included increased private investment, more government spending and growing consumer demand. The forecast for 2013 is between 6.5% and 7% GDP growth. Moody's sees the same level of growth in 2014 and if the favorable economic trends continue in the Philippines, the growth rate could reach 8% by 2016. This makes the country one of the "brightest parts of a generally gloomy global picture."
It is not only Moody's that sees continuing growth in the country. "Standard & Poor's has raised its growth forecast for the Philippines for this year from 5.9 to 6.5 percent," the Inquirer also noted. At the same time, S&P said the economy was expected to post robust growth of 6.3 percent in 2014.
A frequent concern when investing outside one's home country is currency risk. However, the Philippine Peso is strong against the US dollar. Last year it gained 6.5% against the dollar, ranking 9th in the world of performers vs. the American currency. It is little changed YTD in 2013 and forecasts indicate continued strength against the dollar.
The Philippine Stock Market
The Philippine Stock Exchange Index, a weighted average of 30 stocks known as the PSEi, crossed the 6000 line in early January and reached the 7000 mark last Monday, up over 23% year-to-date. This is on top of 32.9% growth last year, making it one of the world's top markets in 2012. The 5-year chart, below the 1 year chart, is nearly as impressive.
One place the optimism shows is in the P/E of the index, which stands at 26.5, perhaps not an inappropriate number for this fast growing collection of stocks.
A broad and representative sample of the Philippine market may be purchased by buying the iShares MSCI Philippines ETF (EPHE).
The fund is $500,000,000 in size and has a 0.60% expense ratio. The beta of the fund is 0.73 when compared to the S&P 500. The 12-month yield is 0.65% and the current 30-day SEC yield is 0.53%. I believe owning this fund is the best way to participate in Philippine prosperity.
This country fund consists of 41 stocks, the largest 20 in this market-cap-weighted index fund comprising 82% of the total dollar holdings. The market is heavily weighted toward the Financial Sector, however, a large portion of these firms are involved in real estate development and management, non-banking or other traditional financial services. These companies had a very good year in 2012 and that is continuing this year.
While I feel that individual Philippine stocks are not the best choice for the average US or Canadian investor, I provide below some possible candidates for evaluation by those who feel otherwise. The Philippine Long Distance Telephone Company, often referred to as PLDT, is traded on the NYSE as an ADR (PHI). About 25 other Philippine firms are traded over the counter in the US as either sponsored or unsponsored ADRs. I believe that many of them are a lower class of ADR, which does not require them to do SEC filings, nor does it offer them the opportunity of major exchange listing.
The below table lists the PSEi stocks (30 stocks similar in concept to our Dow Jones 30) with a red "i " beside each stock that is one of the iShares EPHE top 10 holdings. This list is sorted by 2012 return.
The many risks involved in investing in emerging nations are often summed up as country risk. In general, even with all the advances being made by the administration of President Aquino, the Philippines is still a relatively high-risk country. The rule of law is not as strong as it probably will be in the future; one often settles for the customary rather than the ideal. The institutions, which guarantee individual and corporate rights, have a history of being weak and corrupt. At best the courts and administrative systems are highly politicized.
The physical infrastructure is also lacking. Manila, the capital city, has such poor drainage that even two or three days after heavy rains the streets can be flooded with knee deep water. Power outages are common everywhere in the country, but in no place are they as bad as on the southern island of Mindanao. Rotating 8 hour blackouts are the norm this summer.
The Philippines remains a very poor country for the 28% of the population living below the poverty line, a line which is in a very different place from the line with the same name in America. Yesterday's optimistic front-page headline about economic progress was followed by one today which cried, "Poor Get Poorer." Indeed, the percentage of people living in poverty is almost exactly the same as it was in 2006.
However, I see more optimism and hope here, along with real progress, than I have ever seen in the past. The Filipinos are a happy people and a good people. For the first time in many years they have the good and capable leader they deserve. I am most happy to participate in their good fortune by virtue of a position in the iShares Philippine Fund, EPHE.