Investors have been making little distinction among countries during the emerging markets selloff this year – if it's emerging, it has been tainted by capital flows, currency worries and weak stock prices. But amid the widespread disdain, one country has been getting a surprising number of bullish nods from observers: The Philippines.
Laurence Bensafi, manager of the RBC Emerging Markets Dividend Fund, mentioned it a few months ago as a top prospect. Mark Matthews, head of Asia research at Julius Baer, has also singled out the country in recent research.
And now, strategists at Pavilion Global Markets have added to the bullish enthusiasm with a report that singled out the Philippines for its solid structural fundamentals.
"In this period of skepticism towards anything under the 'EM' label, we are always on the hunt for a good, solid EM growth story with appealing structural features," the strategists said in a note. "Of course, these stories are somewhat lonely and hard to find at the moment, but this only makes them more interesting. We believe that the Philippines is one such country..."
Investors often prefer to invest in emerging markets using broad exchange-traded funds that provide exposure to the entire universe – from giant China to tiny markets such as Egypt and Hungary – or the essentials contained within BRIC funds (Brazil, Russia, India and China).
The Philippines forms a relatively thin 0.9 per cent slice of emerging markets, but investors can now focus on the country with an ETF – the iShares MSCI Philippines fund, which trades in New York under the ticker EPHE.
Why would you want to? Pavilion makes several convincing points in its favour, arguing that the downside risks of getting caught up in an emerging markets downturn are lower, but the upside opportunities of benefiting from economic reforms and economic ties to Japan are higher.
Its debt profile looks far more attractive than many other emerging markets. Countries such as Brazil and South Africa have large amounts of private-sector debt, racked up when commodity prices were strong. The cost of servicing the debt is rising at the same time that income growth is slowing. By contrast, private debt levels in the Philippines have been falling, to the point where indebtedness is half what it was during the Asian financial crisis in the 1990s.
As for external debt, the Philippines also looks strong. "The country's external debt is low and declining, suggesting that the country's domestic expansion has not been funded with foreign savings and is more sustainable as U.S. rates normalize," the strategists said.
Meanwhile, foreign exchange reserves have survived the impact of bond-purchase tapering by the U.S. Federal Reserve, providing a layer of protection should capital inflows come to a halt.
Yes, the Philippines looks as though its fortunes are tied to China, which suggests that any dramatic slowdown there is going to hurt. But looks can be deceiving: The proportion of trade with China has been flat over the past 10 years, and exports to China are holding at just 10 per cent.
"Interestingly, trade with Japan is more important and has picked up in recent months, suggesting that Japanese reflation is outweighing the Chinese slowdown in terms of its impact on the Philippines' overall exports," the Pavilion strategists said.
Domestic consumption within the Philippines is helped by remittances from foreign workers. These remittances have grown at a 7 per cent clip, annually, since 2009. As well, the country's leadership has pledged to double infrastructure spending as a percentage of gross domestic product by 2016, which bodes well for the country's productivity.
For all these promising characteristics, though, the Philippine market has suffered more than other emerging markets. Since May, when investors began to discount shifting Fed monetary policy, the iShares MSCI Philippines fund has fallen about 25 per cent, more than double the decline of the broader iShares MSCI Emerging Markets fund. Over the same period, the S&P 500 has risen 12 per cent.