Philippines ETF: Risks and Rewards

Oct. 4.10 | About: iShares MSCI (EPHE)

The launch of the iShares MSCI Philippines (NYSEARCA:EPHE) exchange traded fund has put the Southeast Asian country in investors’ sights. Before you invest, here are some things you should know.

Growth Prospects. The Asian Development Bank (ADB) expects the Philippines to grow by 6.2% this year, up from its previous 5% projection in July, writes Fred M. Lobo for Manila Bulletin. The Bangko Sentral ng Pilipinas (NYSE:BSP) stated that annual inflation will fall between 3.6% and 4.5% as a result of “the decline in utility rates plus abundant supply in the market of selected food items.”

Mitul Kotecha, head of global foreign exchange strategy of France-based Credit Agricole Corp., said that the Philippine’s economy may expand up to 7.5% this year but slow to 5% next year as the global recovery slows and effects of government stimulus runs out, according to BusinessWeek Online. Meanwhile, the government projects 5%-6% growth for 2010 and a 7%-8% expansion for 2011.

Strengths. The Philippine economy is boosted by strong domestic investment and industrial output. Investments from rich OECD-member countries in the United States and Europe could increase after the removal of RP from the world list of havens. International firms are investing millions if not billions to expand into the Philippines.

The Philippine financial sector has minimal exposure to securities issued by global financial institutions, low dependence on exports, a strong domestic consumption base and a growing business process outsourcing industry, as stated by the CIA World Factbook.

Risks. Foreign investors are still cautious about the country’s poor governance, political instability, corruption and poor fiscal health.

The ADB believes that the short burst of growth in the first half won’t be matched in the second half since the low-base effects of pet capital projects will fade, inventory rebuilding will begin to normalize and the global economy remains weak, according to BusinessWeek Online.

The country will have to maintain financial reforms, boost trade, reduce poverty levels, and improve employment and infrastructure to be on par with regional competitors.

  • iShares MSCI Philippines Investable Market Index Fund: top sectors include financials (46.4%), utilities (17.2%), telecom (15.7%) and industrials (15%)

Max Chen contributed to this article.

Disclosure: None