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Philippines Lags 2018 Growth Estimate: What Awaits EPHE?

Zacks Equity Research
On an annual basis, Philippine's fourth-quarter GDP expanded at a 6.1% rate in comparison to the previous quarter's downwardly revised 6.0%, putting EPHE in focus.

In the fourth quarter of 2018, the Philippine economy grew at a slightly faster rate than the third quarter. On an annual basis, fourth-quarter GDP expanded at a 6.1% rate in comparison to the previous quarter’s downwardly revised 6.0%. President Rodrigo Duterte's economic team had projected 7.1% GDP growth for the October-December period.

Philippine Statistics Authority (PSA) attributed the slower rate of expansion to slowdown in the agriculture and manufacturing sectors. The institution brought attention toward the deceleration of the Chinese economy, which affected the country’s export levels. Among the major economic sectors, the industry recorded the fastest growth of 6.9%, followed by services (6.3%) and agriculture (1.7%) during the fourth quarter of 2018.

For the entire 2018, GDP growth stood at 6.2%, missing the government’s downwardly revised target of 6.5-6.9%. This was also the slowest rate of growth seen in three years. The Philippine economy grew at 6.7% in 2017.

Despite missing projections, the Philippines economy is still among the fastest growing in Asia, next in line to India, Vietnam and China.  Philippines' inflation crisis showed signs of easing, as price levels eased to 5.1% in December 2018.

Easing inflation levels gave domestic consumption a slight boost in the last quarter, as it grew 5.4% on a year-over-year basis, up from previous quarter’s 5.2%. However, the figure brought the average inflation for 2018 to 5.2%, still above the government’s target range of 2-4%.

Consumer spending, accounting for more than half of the total output, has traditionally been the driving force behind the growth in the Philippine economy. Per Standard Chartered economist Chidu Narayanan, domestic consumption is likely to remain the biggest growth driver in 2019.

For curbing the surging capital outflows and monitoring inflation levels, the central bank of Philippines had lifted the policy rate by a cumulative 175 basis points since May 2018. Economists believe that if growth rates fall further, the central bank could loosen the policy for 2019. The central bank’s first meeting of this year is on Feb 7 (read: Philippines ETF in Focus Post Fifth Rate Hike for the Year).

What Lies Ahead?

In spite of signs of slowing global economic growth, the head of President Duterte administration’s economic team, is still optimistic that their country would achieve at least the lower end of its 7-8 % growth goal in 2019 with increased infrastructure spending. Per finance secretary Carlos Dominguez III, the Philippines will continue to build on its self-created momentum and the massive economic investments that have been programmed for the year.

Carlos added that despite the strong headwinds percolating the international economic scene, the Philippine economy is fairly insulated, given the policies, good tax collections and the fact that the country is not a big international trader.

The Philippine economy is expected to benefit in the coming days from a rise in consumer spending buoyed by cooling inflation levels. However, London-based Capital Economics believes that chances of a sustained rebound in growth for 2019 are “slim.” Expectations of slowdown in infrastructure spending due to the delayed passage of the new national budget, tighter monetary policy and lackluster export growth could be the possible reasons for the bleak outlook, per Capital Economics.

EPHE in Focus

Against this backdrop, we highlight the pure play ETF targeting the Philippines. The ETF has been performing strongly in 2019, buoyed by a surge in consumer spending and overall improved global market sentiment on the back of development in trade talks. It has returned 7.4% in the said time period (as of Jan 24) (read: U.S., China to Reach a Trade Deal? ETF Areas to Gain).

iShares MSCI Philippines ETF EPHE

The fund tracks the MSCI Philippines Investable Market Index and comprises 40 holdings. It is moderately traded, having an average daily volume of 307,000 shares. Sector wise, financials (27.2%), real estate (26.4%) and industrials (22.3%) have a double-digit allocation each. The fund’s AUM is $233.5 million and expense ratio is 0.59%. It carries a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (see: all the Asia-Pacific (Emerging) ETFs here).

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