Market Overview

HSBC Hops on Philippines Investment Grade Bandwagon

It is no secret that the Philippines is pushing for an investment-grade credit rating. In fact, and some would say to the country's credit, policymakers there have been overt in their desire to see the country's credit rating boosted.

In March 2012, the country's chief economic manager said in public that the Philippines is "is the most underrated country in the world" and that the country's current rating is four notches below where it should be.

At least one major global bank has bought into the thesis set forth by Benzinga in mid-2012. That being the Philippines will in fact see an investment-grade credit rating at some point in 2013.

In a new research note, HSBC said it expects the Philippines to land an investment-grade rating in the second half of this year. Additionally, the bank raised its 2012 GDP growth forecast for the Southeast Asian country by 30 basis points to 6.5 percent and its outlook for this year to 5.9 percent, also a 30-basis point increase, Barron's reported.

For now, the HSBC report is having a minimal impact on the iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE). EPHE, one of the best-performing ETFs of any stripe in 2012, is up fractionally Monday on above-average turnover. However, it is worth noting the $240 million ETF is less than 30 cents removed from its all-time high touched earlier this month.

Betting on exactly when the Philippines lands an investment-grade rating could prove tricky. In May 2012, Moody's Investors Service finally got around to raising its outlook to positive on the Philippines. It took Standard & Poor's two months display similar confidence in the Philippines, but the ratings agency did raise its rating on the Philippines long-term foreign currency-denominated debt to BB+ from BB, the highest rating since 2003. That is just one level below investment-grade.

A case can be made that the Philippines is already deserving of an investment-grade and that EPHE's stellar performance over the past year shows investors have started to price in that event before it happens. After all, the Philippines had gross international reserves of almost $82.1 billion in October 2012 and a debt-to-GDP ratio of less than 51 percent.

Another reason the Philippines merits serious consideration for an investment-grade rating is the health of its financial services industry. Philippine banks were by far the best performs in Southeast Asia last year, corporate loan demand is robust and favorable interest rates buoy consumer credit demand.

Should those themes hold throughout this year, EPHE could continue running higher as the ETF devote over 41 percent of its weight to financial services names.

Investors will also want to consider Philippine bonds in advance of a credit rating upgrade. HSBC favors dollar-denominated issues, Barron's reported. The iShares J.P. Morgan USD Emerging Markets Bond Fund (NYSE: EMB), the largest ETF tracking dollar-denominated emerging markets sovereign debt, features an almost 6.6 percent weight to the Philippines.

Investors looking to play Philippine bonds denominated in the local currency, the peso, should consider the WisdomTree Asia Local Debt Fund (NYSE: ALD), which features an allocation of almost 5.8 percent to the Philippines. The iShares Emerging Markets High Yield Bond Fund (NYSE: EMHY) features a 10.2 percent weight to the Philippines, but that fund presents some added risk in the form of its large exposure to Venezuelan issues, which have been somewhat volatile in the wake of news reports regarding President Hugo Chavez's failing health.

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Posted-In: Long Ideas News Bonds Short Ideas Upgrades Barron's Emerging Market ETFs Events Best of Benzinga

 

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