The Philippines: An Emerging Market Flying Under The Radar

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Includes: EEM, EPHE
by: MarketGyrations

Summary

The Philippines lives in the shadow of the more prominent emerging markets and it's often overlooked.

Although they get most of the attention, most of the BRICS have underperformed relative to the Philippines.

Relative good fundamentals and loose monetary policy globally could continue to benefit the Philippines.

When people think of emerging markets some countries get more attention than others. That's the case even though emerging markets consists of a large group of individual countries. The ones that most often come to mind are countries such as Brazil, Russia, India, China and South Africa. These five are collectively known as the BRICS.

One name that does not come up as often is the Philippines. Yet, an argument can be made that the country deserves more attention based on how the country has done and continues to do. Especially in comparison to some of the more high-profile emerging markets that seem to get most of the attention from the investment community.

The Philippines is one of the best emerging markets in terms of performance

The Philippines is part of the MSCI Emerging Markets Index, which is tracked by many ETFs such as the iShares MSCI Emerging Markets ETF (EEM). Even though it accounts for less than 1.5 percent of the index, the Philippines is one of the best performing emerging markets. For instance, the iShares MSCI Philippines ETF (NYSEARCA:EPHE), which tracks the MSCI Philippines Index, is up by 11.6 percent over the last three months.

As a comparison, EEM is up by less than half that amount at 5.7 percent during the same time period. Brazil, one of the five members of the BRICS countries that draws most of the attention, is down by 8.3 percent. It's fair to say that paying attention to some of the less prominent emerging markets such as the Philippines can be well worth it.

The table below shows how the Philippines has performed relative to the five BRICS countries. With the exception of China, the Philippines has managed to outperform all of the other BRICS countries. Not bad for a country that is often overlooked.

Country Change - 3 months Change - 12 months
Brazil -8.3% -25.0%
Russia 27.1% -14.9%
India 9.1% 24.2%
China 12.9% 28.1%
South Africa 7.4% 9.0%
Philippines 11.6% 25.2%

Source: iShares

Why the Philippines has done so well when other emerging markets have done so poorly

The worst performing emerging markets in 2015 are Turkey, which is down by 12.4 percent, and the previously mentioned Brazil. To understand why these countries have done so poorly when other countries such as the Philippines have done much better, it's necessary to take a closer look at some of the differences and similarities between these countries.

Turkey and Brazil are similar in that both countries have very large deficits. For instance, Turkey's current account deficit is at over 5 percent of Gross Domestic Product ("GDP"). Brazil is not that far behind at over 4 percent of GDP.

This forces them to rely on borrowing foreign capital in order to balance their deficits. However, the current environment is one where the cost of borrowing is in danger of going up with interest rates in the United States expected to increase in the second half of 2015. This will make it harder to borrow than before when interest rates were at or near zero.

Even worse is the fact that this issue has been brought to the attention of various governments for some time. Yet while other emerging markets have done all they can to fix the problem, countries such as Brazil and Turkey have made little to no progress in reducing their deficits and other problems. If anything, it has gotten even worse. This is contributing towards a loss of confidence from investors in Brazil and Turkey.

Philippines current account

The Philippines is different from other emerging markets

On the other hand, the Philippines has a current account surplus which stands at 4.4 percent of GDP. Unlike other emerging markets such as Brazil and Russia which rely heavily on the export of commodities, the drop in commodity prices has not affected the Philippines to the same extent.

In the case of the Philippines, other economic activity such as services and remittances from overseas workers are more important to the economy than the export of commodities. This has allowed the Philippines to weather the storm that has negatively affected so many other countries. The country maintains a healthy surplus.

Other fundamentals are also in favor of the Philippines. GDP growth rate is currently at 6.9 percent, which puts it near the top among emerging markets. Inflation is subdued at 2.4 percent. The government has more or less balanced its budget and debt to GDP is relatively low at around 45 percent.

Exchange rate Philippine peso

The relative strength of the Philippines, at least in comparison to many emerging markets, is reflected in its currency. The peso is range bound against the U.S. dollar, which is quite an accomplishment considering the fact that many currencies have fallen big time against the dollar. Some currencies have dropped in value by more than half over the same period.

Conclusion

The Philippines may not be the best emerging market, but it should be grouped among the better ones based on its fundamentals that for the most part are better than most. The one drawback is that the Philippines is fairly expensive at around 19 times earnings, which is about where India is at the moment. Other emerging markets trade at lower valuations.

EPHE trend

At the same time, the Philippines is in a current uptrend and many central banks, especially those in developed countries, continue to maintain a very loose monetary policy. This has the tendency to inflate markets, including those in places such as the Philippines. Assuming this continues to be the case, there is a real chance that the Philippines will continue to see the spillover effects even though it may be overbought in the near term.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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