Market Overview

Debt-Free Future Buoys the Case for Philippines ETF


The iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE) was not just one of the top-performing country funds in the first half of 2012, it was one of the best-performing non-leveraged ETFs period.

EPHE has been a stalwart ETFshowing consistent strength while outperforming the Vanguard MSCI Emerging Markets ETF (NYSE: VWO) by almost 2,500 basis points year-to-date.

The long-term bull case for the Philippine economy and EPHE has received more ammunition: The ASEAN nation may be debt-free in just a few years. Roberto Juanchito Dispo, president and chief executive officer of First Metro Investment Corp. said the country is on a path to being debt-free, according to the Manila Times.

At the University of Santo Tomas Business Leadership CEO Series for 2012, Dispo said the country's "external position is very healthy now."

The concept of a country being debt-free might boggle the minds of investors that opt to focus on developed markets such as the U.S., the U.K., Japan and the Eurozone. However, the Philippines has $76 billion in gross international reserves. Then there is the World Bank GDP growth forecast of 4.2% this year and 5% in 2013--those catalysts bode well for the health of the country's balance sheet.

Adding to the bullish outlook for the Philippines' fiscal health is a newly bolstered credit rating. Earlier this year, the country's chief economic manager said the Philippines "is the most underrated country in the world" and that the country's current rating is four notches below where it should be.

Earlier this week, Standard & Poor's finally got around to raising the country's long-term foreign currency-denominated debt to BB+ from BB, the highest rating since 2003. The new rating is just one notch below investment grade and it is the same rating S&P has on Indonesia, Southeast Asia's largest economy.

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 is home to a debt/GDP ratio of 51 percent as of the end of the first quarter.

Obviously, the higher ratings help lower borrowing costs for the Philippines and make the country's bonds more attractive to foreign investors. The PowerShares Emerging Markets Sovereign Debt Portfolio (NYSE: PCY), which tracks dollar-denominated emerging markets bonds, has a 4.42 percent weight to the Philippines while the WisdomTree Asia Local Debt Fund (NYSE: ALD) has 5.7 percent exposure to the country. The WisdomTree Asia Local Debt Fund's holdings are denominated in local currencies.

That is not a bad thing considering the Philippine peso has jumped about five percent against the U.S. dollar this year according to Bloomberg.

Dispo also said that business process outsourcing in the Philippines is rivaling that of India, noting that revenue from that business could be $15 billion this year.

EPHE, the lone Philippines-specific ETF available to U.S. investors, features a 38.3 percent weight to financial services stocks and a 25.3 percent allocation to industrial names, indicating the fund is well-positioned to take advantage of improving economic and fiscal trends in the Philippines.

For more on Asian ETFs, click here.


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