Philippines ETF in Focus on Slowing Economy

Though the major ASEAN economies – comprising Indonesia, Malaysia, the Philippines, Singapore and Thailand – are relatively less susceptible than many other nations to the slowdown of foreign capital inflows, these countries might still be a victim to rising levels of household debt and political risks.

And, in fact, they are already feeling the heat. After Thailand and Indonesia, the Philippines has joined the list of countries reporting slower-than-expected growth.

Though the country is one of the best performing emerging markets so far this year, it seems to be in trouble. The Philippines economy which grew at the rate of 7.2% in 2013, the fastest pace since 1950, is now showing signs of weakness (read: Solid Growth Puts Philippines ETF in Focus).

Thanks to last year's super typhoon, the country’s GDP growth rate has fallen below 6% for the first time in the past nine months. The Philippines Q1 GDP grew at a lesser-than-expected rate of 5.7% year over year, marking the slowest pace in two years.

The sluggish GDP growth was mainly due to weak growth in the agricultural sector, hurt as it was by the devastating Typhoon Haiyan. Major crops like coconuts took a beating while tourism and the insurance industries were also not spared, as per the country’s economic planning agency.

The Philippines President Benigno Aquino is still confident that the economy would be able to clock in at the 6.5–7.5% growth target. Part of the confidence stems from the fact that the government is expected to increase infrastructure spending to record levels this year.

The government plans to speed up typhoon reconstruction efforts, invest in highways and ports, create jobs and attract more investment. With weak GDP last quarter, there are high chances that the country’s central bank could keep interest rates low in its next policy meeting.

Moreover, some of the initiatives by the President to bolster the nation’s “economy and government” have already won accolades from Standard and Poor’s. The credit rating agency recently raised the long-term sovereign credit rating of the Philippines by one notch to BBB from BBB- and inferred a stable outlook (read: S&P Credit Upgrade Boosts Philippines ETF).

Philip McNicholas, a senior economist at BNP Paribas SA in Hong Kong, also believes that Q1 is expected to be one of the weakest quarters, with growth expected to resume in the upcoming periods.

However, forecasts of El Nino can be a major headwind and hurt agricultural output. If true, this could add to inflationary pressure.

Market Impact

Following the weak set of data, the Philippines Stock Exchange index fell by 1.64% or 111.21 points to close at 6,676.67 with heavy volumes on May 29, 2014 - the lowest level in a month.

Moreover, iShares MSCI Philippines Investable Market Index (EPHE), the only pure play ETF focused on the nation, fell 1.4% following the news (see all Asia-Pacific (Emerging) ETFs).

The disappointing data is expected to dampen investor sentiment at least for the next few trading sessions. Some of the biggest Philippines money managers even expect Philippines stocks to face some headwinds in the near term following five months of gains on lofty valuations.

Thus investors should remain cautious in the short term, as EPHE might lose some of its earlier booked gains (read: 3 Emerging Market ETFs Off to a Great Start in 2014).

EPHE in Detail

Launched in September 2010, the fund looks to track the MSCI Philippines Investable Market Index. The fund has amassed around $353 million and trades in good volume of roughly 300,000 shares a day.

The Financial sector takes the top spot in the fund with about 36.5% exposure, followed by Industrials (26%). However, Information Technology, Materials and Energy have the lowest allocation in the fund.

The fund holds a small basket of 44 firms, with roughly 60% of assets invested in the top 10 holdings – suggesting concentration risk. Ayala Land (8.6%), Universal Robina Corp. (6.4%) and BDO Unibank Inc. (6.4%) comprise the top three holdings.

The fund charges an expense ratio of 61 basis points. EPHE, which has gained over 15% in the year-to-date frame, has been losing steam for the past two weeks. The fund has lost 2.3% in the past week and might remain volatile in the coming days.

We currently have a Zacks Rank #3 or Hold rating for EPHE, so investors should definitely take a cautious approach to the fund at this time.

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