GDP Report Shows Philippines Juggernaut Going Strong

One of last year's top-performing emerging markets and the corresponding may be up to their old tricks again if an economic data point delivered Wednesday night is any indication. While most Americans were sleeping, the Philippines said its 2012 GDP surged 6.6 percent buoyed by growth of 6.8 percent in the fourth quarter. Growth of 6.6 percent for the year was well above the government's own estimate of five percent to six percent. Importantly per capita GDP, or GDP divided by the population, surged to 8.8 percent from 2.2 percent in 2011. Of the three members of the Association of Southeast Asian Nations (ASEAN) that have released 2012 GDP data, the Philippines has easily topped Singapore and Vietnam, which posted growth rates of 1.1 percent and 5.4 percent, respectively. GDP reports, even the good ones, are not guarantees of immediate price response with the corresponding ETFs. However, it is not outlandish to say the most round of economic growth figures from the Philippines is very good news for the iShares MSCI Philippines Investable Market Index Fund EPHE. EPHE, coming off a year in which it was one of the best-performing emerging markets ETFs, is up 6.3 percent year-to-date and has joined in the Philippine Stock Exchange PSEi Index in making a series of fresh all-time highs. The ETF touched a new all-time high of $37.40 Wednesday before settling at $37.28. Details of the GDP report indicate EPHE can keep moving higher this year. Improvement in the construction and manufacturing sectors aided growth while strong domestic demand helped insulate the Philippines from a slowing global economy. Regarding the first point, EPHE is poised to benefit from a Philippine construction and manufacturing boom because the ETF allocates over 24 percent of its weight to industrial stocks. Regarding the domestic demand story, this is arguably an under-appreciated element of the Philippine investment thesis. Located in a corner of the globe littered with export-dependent economies, it is easy to see why some foreigners believe the Philippines is export-dependent as well. In Southeast Asia, that usually means being highly dependent on China as a trading partner. However, China was just the Philippines' third-largest trading partner in the first half of 2012, well behind Japan and the U.S.. The correlation between EPHE and China ETFs is not as intimate as some might think. In the past year, EPHE has offered nearly quadruple the returns of the SDPR S&P China ETF GXC while having a correlation of just 0.54 to GXC, according to State Street data. A strong services sector also helped the Philippines post the aforementioned robust growth numbers. That is not a surprise as the Philippines has passed India as the world's top business process outsourcing and call center destination. Business process outsourcing could a $25 billion industry accounting for up to 10 percent of the Philippine economy by 2016. That underscores the rising Philippine middle class, rising domestic consumption and reduced dependence on exports. As for EPHE, Sun Life said its base case for the Philippine Stock Exchange Index to rise to 6,500 over the next 12 months with upside as high as 7,000. The index currently resides just below 6,300. Sun Life said average Philippine corporate earnings could grow by as much as 17 percent this year and the firm named banks among its preferred Philippine sectors for 2013, according to the Philippine Daily Inquirer. Sun Life also likes some industrial-related names. In other words, the firm is bullish on over 66 percent of EPHE's sector weight. For more on the Philippines, click here.