ETF Soars as Philippines Presses For Investment-Grade Rating

Entering Friday's holiday-shortened trading session, the iShares MSCI Philippines Investable Market Index Fund EPHE has outperformed the iShares MSCI Emerging Markets Index Fund EEM by 75 basis points over the five previous trading days. On the surface, that performance would appear to be the extension of a prominent theme among emerging markets ETFs this year. That being stellar performances by those funds tracking smaller developing markets relative to the lethargic returns offered by ETFs tracking the largest emerging nations. When it comes to the recent bullishness in the iShares MSCI Philippines Investable Market Index Fund, already one of this year's best emerging markets ETFs, there is more to the story. Late last week, the Philippine Treasury announced it will spend $1.46 billion to repurchase dollar- and euro-denominated bonds. The Philippines expects to cut annual interest costs by $53 million through repurchasing dollar- and euro-denominated bonds due mostly from 2014 to 2016, Bloomberg reported. Paring interest expense could be the latest sign the Philippines really could make a legitimate stab at eventually being debt free or at least come somewhat close to that enviable fiscal status. The Philippines has $82 billion in gross international reserves and had a debt/GDP ratio of 51 percent earlier this year. The debt repurchase plan also highlights something else both bond and equity investors need to be aware of regarding the Southeast Asian nation: A strong desire for an investment-grade credit rating. Earlier this year, Standard & Poor's finally got around to raising the country's long-term foreign currency-denominated debt to BB+ from BB, the highest rating since 2003. That rating is just one notch below investment grade and it is the same rating S&P has on Indonesia, Southeast Asia's largest economy. In May, Moody's Investors Service raised its outlook on the Philippines to positive. Last month, the ratings agency upped its rating on Philippine debt to Ba1, one level below investment grade territory. The bond repurchase program is seen by some local traders as a boon for Philippine banks. In turn, that could lead to more upside for EPHE because the financial services sector accounts for 38.4 percent of the ETF's weight. Local press reports have recently speculated on increased mergers and acquisitions among Philippine banks with several EPHE constituents being mentioned in those reports. Investors have taken note and have pushed EPHE's assets under management total up nearly 13 percent in the past six months. Bond investors are not likely to be left out in the cold by the ebullience surrounding the Philippine economy. Growth is slowing, albeit slightly, implying Philippine bonds could become a preferred destination for some investors looking for exposure to the country. Local currency bonds might be the way to play that theme. Through the end of September, the Philippine local currency bond market grew 16.1 percent year-over-year, according to the Asia Development Bank. Investors looking for exposure to peso-denominated bonds should consider the WisdomTree Asia Local Debt Fund ALD. The $437.7 million actively managed ETF devoted 5.65 percent of its weight to Philippine bonds. ALD's credit profile is not ultra-risky as two-thirds of the fund's holdings are rated A or higher. For more on the Philippines and ETFs, click here.