Published September 23, 2013
It has been a wild year for the iShares MSCI Philippines Investable Market ETF (EPHE), the lone ETF devoted exclusively to the fast-growing Southeast Asian economy.
From the start of 2013 through its pre-tapering talk May highs, EPHE surged more than 26 percent even as countless pundits and so-called experts lamented the disappointing performances being in turned by "emerging markets."
Said another way, while EPHE and Philippines stocks climbed higher, most professional money managers were licking their wounds inflicted by the BRIC nations and other large developing markets. They also missed out on two ratings agencies moving the Philippines to investment-grade territory.
In fairness, ignoring EPHE ended up looking like a good move, no matter how unintentional, because when talk that the Federal Reserve would taper its quantitative easing program began in late May, the ETF sank. Save for a short-lived rally in July, EPHE fell more than 33 percent from its May high to its September low around $29. The fund has since jumped 18.2 percent.
A fair amount of EPHE's September success is attributable to the Fed's decision not to taper QE, one that lifted a plethora of emerging markets ETFs. However, last Friday's 4.6 loss reminded investors that EPHE is not out of the Fed woods yet. No emerging markets ETF is, but EPHE ought to be. Here is why.
Everyone Loves A Surplus Some previously high-flying emerging markets have taught investors a valuable: Put a premium on current account surpluses. Indonesia, one market the Philippines is often measured against due in large part to regional proximity, saw its currency battered, bond yields spike and equity market tumble because tapering talk exposed the problems of the country's current account deficit.
Two of the top-performing emerging markets over the past few months have been China and South Korea, both of which have account surpluses. Well, it cannot be ignored the Philippines has its own surplus.
Goldilocks Monetary Policy When it comes to central bankers, it is not a stretch to say nearly every American investor knows who Ben Bernanke is. Plenty also recognize the names Mario Draghi and Haruhiko Kuroda. They ought to get acquainted with Bangko Sentral ng Pilipinas Governor Amando M. Tetangco Jr. Tetangco has his developed market counterparts beat on multiple fronts, but most notably interest rates. Rates in the Philippines are neither too high nor so low as to engender concerns about inflation.
So at a time when India and Indonesia are surprising markets with rate hikes and South Korean rates may already be too low to do much if the won gains too much strength, the Tetangco's monetary policy looks good by comparison.
Even before tapering entered the equation the central bank bolstered foreign exchange reserves, strengthened the country's external liquidity position and was active in the forex market in an effort to prevent violent moves in the peso, according to the Philippine Daily Inquirer.
Not Bubblicious There is often talk of investment bubbles and many revolve around real estate. There has been ample chatter of Chinese real estate bubble.
It was a real estate and construction boom turned bubble that wrecked Dubai's economy and equity market during the financial crisis. And the list goes on. However, because the Philippine economic story is still in the early innings, ordinary Filipinos are looking to buy property for consumption not speculation. Translated into a language Americans understand, Filipinos want to buy houses to make a home, not sell the house three weeks later.
Tapering: Overstated In the hysteria caused by an institution as powerful as the Fed, it is easy for markets to overreact and for investors to lose their cool. The negative, tapering-induced reactions toward Indonesia and other Southeast Asian markets were justified, but those same reactions should not have been applied to the Philippines.
"The Philippines doesn't really come out as vulnerable to the taper in terms of fundamental indicators," said Citigroup, citing the country's strong forex reserves. The bank added: "Emerging markets, particularly Asia, are dependent on exports to China. But Philippines, again, is not that exposed." The bank forecasts Philippine GDP growth of seven percent this year and 6.8 percent next year.
The growth estimate of seven percent for 2013 may prove conservative after Philippine GDP jumped 7.5 percent last quarter.
Earlier this year, Nomura highlighted the Philippines as one of the Asian markets least vulnerable to tapering, saying the account surplus should prove advantageous and that an improving business climate is helping lift foreign investment.
Government spending will reach a record this year, which is doable with the country's strong balance sheet, and necessary to help lower poverty and unemployment. If those come down, EPHE should go up.
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