A stronger peso could be the latest catalyst to prove efficacious for the Philippine investment thesis, one that has been on the receiving end of plenty of bull calls this year.
Bank of America-Merrill Lynch sees the Philippine peso averaging 41 against the U.S. dollar in the first quarter of 2013 before appreciating to the sub-40 area. As of today, $1 buys almost 41.2 pesos. The Bank of America-Merrill Lynch forecast is more bullish than the government estimate of 42 to 45 pesos to a dollar.
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Bank of America-Merrill Lynch, which expects the peso to average 42 in the current quarter, said in a research note the outcome of today's U.S. elections will have a "neutral" impact on emerging markets currencies, including the peso.
A strong peso could lead to lower profits on exports, but that scenario may not hamper the iShares MSCI Philippines Investable Market Index Fund (NYSE:EPHE) as much as might be expected. EPHE, the lone ETF exclusively devoted to the Philippines, is heavily focused on the country's domestic economy, not its export story.
Financial services, utilities, consumer staples and telecommunications names combine for over 68 percent of EPHE's weight. Those sector weights highlight the fund's leverage to the Philippines' domestic growth story. That growth story has helped make EPHE one of the best emerging markets ETFs in 2012.
With nearly $137 million in assets under management, EPHE has surged almost 37 percent this year. Earlier today, the ETF touched a new all-time high at $32.34. The country has $76 billion in gross international reserves and improving credit ratings, so it is possible foreign investors can deal with a stronger peso to gain exposure to Philippine equities.
The other side of the story is that a stronger peso could benefit Philippine bonds, an asset class that can also be accessed via ETFs. The iShares Emerging Markets Local Currency Bond Fund (NYSE:LEMB) features a weight of almost 4.4 percent to the Philippines.
Investors looking for actively managed funds should consider the WisdomTree Emerging Markets Local Debt Fund (NYSE:ELD). ELD, the second-largest actively managed ETF on the market, has a 3.5 percent allocation to the Philippines. ELD's cousin, the WisdomTree Asia Local Debt Fund (NYSE:ALD), goes even further. ALD, which has almost $432 million in AUM, sports a 5.68 percent weight to the Philippines.
All three of these bond funds share two important traits in common. All pay monthly dividends and the holdings in all three are denominated in local currencies, including the peso, providing investors with a hedge against dollar weakness.
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