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Philippines ETF Flounders as Third Upgrade Looms


The iShares MSCI Philippines ETF (EPHE) , previously a shining star among emerging markets ETFs this year, has been stung by some of the same factors that have plagued other funds tracking developing world economies. Namely, a plummeting currency and fears regarding the Federal Reserve tapering its quantitative easing program.

In fairness to EPHE, the lone Philippines ETF has gained about 5.2% over the past month, a performance that is roughly twice as good as what the Vanguard FTSE Emerging Markets ETF (VWO) has offered. However, EPHE has lost about 2% in the past week, a decline that could further cement the notion that the ETF is no longer as sensitive to positive headlines a it previously was. [Good News no Longer Benefiting Philippines ETF]

Those bullish headlines have included upward revisions for GDP growth and multiple sovereign debt ratings upgrades that helped the Philippines land investment-grade credit ratings. The Philippines landed two investment-grade ratings earlier this year, the first from Fitch Ratings and the second from Standard & Poor’s, and a third one could arrive this week with a team from Moody’s Investors Service visiting the Southeast Asian country. [Philippines ETF Rises on Credit Upgrade]

Last Friday, Bangko Sentral ng Pilipinas (BSP) governor Amando Tetangco Jr. said the New York-based debt watcher is scheduled to visit this week, which is expected to be followed by a committee meeting back home, according to the Philippine Star. The central bank governor told the Star his country could gain an investment-grade rating from Moody’s “sooner than earlier expected.” Last week, the ratings agency put the Philippines on review for a possible upgrade.

Moody’s currently rates Philippine sovereign debt Ba1, the highest junk rating. However, with two ratings agencies having beaten Moody’s to the punch, a third investment-grade rating for the Philippines may already be priced into shares of EPHE and bond ETFs such as the WisdomTree Asia Local Debt Fund (ALD) that have exposure to the country. ALD has a 5.62% weight to peso-denominated bonds.

With favorable demographics, a sturdy government balance sheet and strong domestic consumption trends, there is little doubt that the Philippines deserves an investment-grade rating. Still, there is lingering doubt about how much of an impact a third such rating will have on ETFs such as EPHE and ALD.

iShares MSCI Philippines ETF

ETF Trends editorial team contributed to this post.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.