EEM iShares MSCI Emerging Markets

Emerging markets (EM) have fallen out of the favor on the Fed’s escalation of the QE taper which has left many investors apprehensive about the near term outlook. Amid such a backdrop, some nations with robust exports and sound macroeconomic fundamentals held up pretty well. 

The Philippines is one such country. This is especially true given the nation's robust GDP growth rate (Read: Emerging Market ETFs: Any Bright Spots?).

Economic Indicators Round Up

The Philippines economy has expanded at the fastest clip since the 1950s over the last two years logging GDP growth of 7.2% in 2013 on top of 6.8% in 2012. This towering growth rate – despite the multi-billion peso wreckage from Super Typhoon Haiyan (which hit the island nation in early November) tagged it the second fastest growing major economy in Asia placing it just behind the China which grew 7.7% in 2013 (read: Super Typhoon Haiyan Puts Philippines ETF in Focus).

The uptick in service and industry sectors was given credit for this impressive gain. Also, expansion of business process outsourcing firms and flocking tourists contributed to the nation’s success story.

The country reiterated its growth projection of 6.5% to 7.5% for this year. The growth outlook was raised by the IMF which expects the country to be supported by higher exports and reconstruction of areas thumped by the typhoon. IMF upgraded the 2014 growth outlook to 6.3% from 6% in September while the nation is expected to grow in the range of 6.5% to 7.0% in 2015.

Another research organization, Citigroup, anticipates the Philippines’ GDP growth to be 6.8% this year and strike a 7.3% growth rate next year, aided by some huge public-private partnership projects underway. President Benigno Aquino aims to attain 8.5% growth by 2016.

Exports comprise about one third of Philippine GDP which makes the country vulnerable to the health of its major trading partners. The country trades a great deal with Japan (around 28%), and the U.S. (15%) ensuring that it is heavily exposed to two countries which are growing at a reasonably solid clip (read: Is Another Great Year Ahead for Japan ETFs?).

The Philippines is among the very few countries in Southeast Asia that have a decent current account balance – less than 3% of GDP – at present. Remittances from abroad – accounting for 8% to 10% of country’s GDP – is another striking part of the economy which drove its forex reserves and shored up its currency to a large extent. Thanks to these respectable economic indicators, the Philippines attracted the second biggest foreign direct investment (FDI) inflow for the first half of 2013.

The Philippines currently boasts foreign exchange reserves of about $80 billion. Its currency peso slipped only 2.3% so far in the year (as of February 10, 2014). The rate of decline is quite limited in contrast to the broader emerging market currency ETF WisdomTree Emerging Currency Fund’s (CEW) loss of 7.08% in the past one month. Thus, the country appears to be in a position to withstand the effects of foreign capital reversal in the future.
 
Market Impact

Since the release of its 2013 GDP numbers (in January 2014), the broader market fund on Philippines economy – iShares MSCI Philippines Investable Market Index (EPHE) – gained 1.7%. This is the only one pure-play ETF in the Philippines market.
 
iShares MSCI Philippines Investable Market Index (EPHE)

Launched in September 2010, this ETF looks to track the MSCI Philippines Investable Market Index. The fund invests about $254.4 million of assets in 44 securities.

The financial sector takes the top spot in the fund with about 40% exposure and is closely followed by industrials (27%). No other sector gets a double-digit allocation in the fund.

It is worth noting that the fund has considerable concentration risk with about 57.62% of assets invested in the top 10 holdings. Ayala Land (8.4%), BDO Unibank (6.56%) and Philippine Long Distance Telephone (6.49%) make up the top three holdings. 

The fund charges an expense ratio of 62 basis points. EPHE lost about 7.93% in 2013. Over the last one month, EPHE gained about 1.25% while iShares MSCI Emerging Markets ETF (EEM) shed about 2.64%. EPHE currently has Zacks ETF Rank #2 (Buy).

Risks

While the overall picture is rosy, one should also be wary of near-term drags. Analysts are expecting the Philippines to post a sluggish first-quarter in 2014 hurt by weaker agriculture output bearing the impact of the colossal typhoon. Also, the inflation which was contained at less than 3% level in 2013 will likely spike to over 4% this year on rising energy and food costs.

In fact, the IMF raised its inflation outlook to 4.4% for 2014 from the earlier guidance of 3.5% but has a moderate projection of 3.8% for 2015. Notably, the Philippines central bank has an inflation target of 3% to 5% for this year and 2% to 4% for 2015. Apart from this, overall emerging market weakness will also be in place, but EPHE has clearly set itself apart from the rest and could remain a solid emerging market pick for investors in what has otherwise been a choppy market segment  (read: Time to Panic About Emerging Markets?).

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WISDMTR-EMG CUR (CEW): ETF Research Reports
 
ISHARS-EMG MKT (EEM): ETF Research Reports
 
ISHARS-MS PHILP (EPHE): ETF Research Reports
 
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