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Philippines ETF Surges on Fitch Upgrade

Philippines finally got the much anticipated “investment grade” rating from Fitch Ratings yesterday. The stock market rejoiced and the ETF tracking the country--iShares MSCI Philippines Investable Market Index ( EPHE )--added another 2.5% today to its impressive 15% return year-to-date and 41% return over the 12-month period.

The Philippine economy expanded by 6.6% last year and is expected to grow at 6.0% this year. The country is shielded to a great extent from the global economic headwinds largely due to its thriving domestic demand, which constitutes about 70% of GDP. Further the country still has relatively low credit-to-GDP and loan-to-deposit ratios and thus, ample scope for credit growth which will further fuel the domestic demand. (Read: Indonesia ETFs leading the pack in 2013)

Thanks to its large educated young population (country’s median age is 22 years) that can speak English, Philippines has been growing in popularity as a BPO destination and has emerged as a tough competitor to India.

A lot of the credit for the country’s recent economic performance goes to the current administration led by President Aquino, which has been very effective in combating corruption and tax evasion. (Read: Time to buy Thailand and Philippines ETFs)

With an improving fiscal situation (fiscal deficit is 2% of GDP), low inflation rate (~3%), comfortable foreign exchange reserves position (up five hold since 2005) and a stable currency, the country has been a hot spot for foreign investments. If the country manages to win investment grade status from one of the two other major rating agencies S&P and Moody’s, the fund flows into the country would surge further.

Philippine stock market is up about 15% this year, making it one of the best performing markets in the world, after a spectacular performance last year. The Peso also remains strong—it has strengthened ~5% against the US dollar over the past year.

Long-term fundamentals for the economy look good in view of the stable political situation and the popular government that seems committed to accelerate the pace of reforms in the country.

Despite excellent growth prospects, the country faces some significant obstacles like poor infrastructure and corruption. (Read: 4 Best ETF Strategies for 2013)

iShares MSCI Philippines Investable Market Index (EPHE) is a low-cost and convenient way to get exposure to the country’s equity market. EPHE has a Zacks ETF Rank of 2-'Buy'. With the solid run over the past year, the ETF does not look cheap at all but given the macroeconomic fundamentals and growth prospects, it still looks attractive as a long-term investment.

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