Market Overview

Peace Pact Could Boost Philippines ETF

Already up more than 34 percent year-to-date, a performance that ranks among the best for country-specific ETFs, the iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE) could be on the receiving end of another positive catalyst.

Over the weekend, Philippine President Benigno Aquino reached a deal with Muslim rebels that is being viewed as the country's best opportunity to end four decades of violence with insurgent groups. Negotiations with the Moro Islamic Liberation Front are being hailed as an opportunity for the Philippines to end violence with rebel groups, including some with ties to al-Qaeda. Four decades of violence with rebel factions has resulted 200,000 deaths, according to Bloomberg.

For investors, increased peace and stability in the Philippines could be the catalyst to increase foreign investment in what is already a buoyant economy. EPHE has proven resilient in the face of turbulent times for other emerging markets ETFs and Philippines-specific challenges.

For example, the ETF languished in August after floods struck the country, claiming nearly 100 lives. EPHE shrugged off the August downdraft to touch a new all-time last week.

Even without news of a possible peace accord with militant factions, the Philippines and EPHE have already provided investors with plenty of bullish catalysts this year. Earlier this year, Standard & Poor's boosted its ratings on the country's long-term foreign currency-denominated debt to BB+ from BB. That is the highest rating for the country since 2003. The move by S&P followed Moody's Investors Service raising its outlook to positive on the Philippines in May. These moves make sense as the Philippines was home to a debt/GDP ratio of 51 percent as of the end of the first quarter.

In the first half of this year, the Philippine economy grew by 6.1 percent. GDP growth is expected to be 4.2 percent this year and five percent in 2013, according to World Bank estimates.

News of the peace talks could help accelerate the Philippines' long-standing goal of attaining an investment-grade credit rating. It could also help the country do something Aquino has long desired: Attract more foreign direct investment to unlock mineral riches in the country's south. The Philippines has an estimated $312 billion in mineral deposits in the south, Bloomberg reported.

Increased mining in the Philippines could boost EPHE because the ETF devotes over 27 percent of its weight to industrial and materials names combined. EPHE also allocates almost 38 percent of its weight to financial services names. The Philippines is home to a vibrant, growing banking sector, but one that is not nearly the size of some more advanced emerging markets. Backed by already strong economic growth, increased political stability and foreign investment could benefit EPHE's largest sector weight, propelling the ETF higher in the process.

Then there is the country's robust external position, which includes $76 billion in foreign reserves and a legitimate possibility of being debt free in the coming years.

EPHE, which has $105.2 million in assets under management, trades at 20.6 times earnings and 3.1 times the weighted average book value of its components. Both figures imply EPHE is expensive relative to a broader fund such as the iShares MSCI Emerging Markets Index Fund (NYSE: EEM), both EPHE has justified the premium this year and the fund sports a beta of below one.

For more on the Philippines, click here.

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