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Another Rally for the Philippines ETF (EPHE)?

Zacks Equity Research

At a time when the developed economies were in the doldrums, Southeast Asia economies showed strong resilience to the overall downturn. The economies in Southeast Asia steered clear of the slowdown and continued to grow at a pace much brisker than the growth rates in the developed economies (Three Country ETFs Struggling in 2013).

Among the dynamic economies of Southeast Asia, one which has been in the headlines of late is the Philippines. The Philippines economy once again became the talk of the town with another credit rating upgrade and this time it came from the major rating agency Standard & Poor's.

It should be noted that in a span of five weeks, this is the second successive investment grade rating coming from two of the chief rating agencies. The previous investment grade rating was made by Fitch Ratings, which also increased their expectation for the nation (Philippines ETF Surges on Fitch Upgrade).

Also, in early 2012, S&P bumped the country's long-term foreign currency-denominated debt to BB+ from BB, the highest rating since 2003. This was topped by Moody’s lifting its outlook on the economy to positive.

The series of upgrades on the economy is thanks to its minimal reliance on foreign currency debt and its low inflation level. These factors have combined to make the country a stellar investment, and an increasingly popular one as well.

Philippines Economy

Beyond these factors, the Philippines has also shown to be quite resilient when facing global economic turmoil. The nation manages to grow at a robust rate even with some weakness in key developed markets, and the outlook remains quite rosy going forward as well.

The economy is expected to post a GDP growth rate of 6% as compared to the earlier forecast of 5%. This projected growth comes on the back of strong consumer sentiment, healthy domestic demand, strong fiscal spending and robust services and construction sectors.

And with the U.S. economy showing signs of improvement, exports from the Philippines are bound to get a boost furthering the positive momentum. However, the slowdown in the euro zone will temper the export level, although this looks to be offset by strong domestic demand (Philippines ETF: A Rising Star in Emerging Market Investing).

Additionally, a moderating inflation level supports the growth momentum of the economy. It should be noted that inflation of the rate eased to a five-year low of 3.2% in 2012. However, a high unemployment level still remains a concern.

Although the outsourcing industry has provided a lot of jobs to Filipinos yet it does not appear to be strong enough to reduce the unemployment level. In such a scenario, the Philippines economy should take steps to convert the strong growth prospects into more jobs, and thereby further add to the consumer class in the nation.

ETF in Focus

Consequently, the ETF tracking the nation, the iShares MSCI Philippines Investable Market Index Fund (EPHE),  had no choice but to march higher. The fund has moved higher by about 2.5% in the last five days, and is now within striking distance of all-time highs once again.

This hasn’t just been a short term trend though, as the fund has been riding the strong fundamentals in the country for quite some time. In fact, the ETF has added roughly 23% YTD and it has surged by 33% in the last six months.

The fund trades with an asset base of $470.2 million and currently has just over 42 securities in its basket. Investors should note that the fund is concentrated in the top 10 holdings with more than 55% of investment.

Among sector allocation, the fund appears to have a concentrated exposure. The maximum sector exposure is to Financials (43.1%) and Industrials (25.36%). Among others the fund does not invest more than 9%. The fund charges a fee of 60 basis points on an annual basis (Too late to Buy the Philippines ETF?).

Bottom Line

The Philippines economy is a combination of strong growth prospects and robust fundamentals. And the series of credit upgrades on the economy should encourage more foreign investment in the manufacturing sector. This will in turn add to the strong momentum in the economy and carry the nation higher.

Given these favorable prospects, investors may opt to invest in the economy via basket form. In such a scenario, EPHE represents a good way to tap the economy, especially considering its solid Zacks ETF Rank of 2 or ‘buy’ which suggests that more good days could be ahead for EPHE (Top Ranked Philippines ETF in Focus: EPHE).

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