Moody's Bullish on The Philippines

The iShares MSCI Philippines Investable Market Index Fund EPHE is trading modestly higher Thursday, but the ETF's slight uptick is enough to have the fund in striking distance of a new all-time high and extends a run that has seen EPHE gain nearly five percent in the past month. Although it flew somewhat under the radar, another compelling catalyst for EPHE and the Philippine investment thesis arrived earlier this week when Moody's Analytics said in a report published Wednesday that the economy there is poised to grow 6.5 percent to seven percent this year. Moody's Analytics, a unit of ratings agency Moody's Investors Service, is forecasting similar 2014 growth for the Southeast Asian nation. Despite the reputation of ratings agencies being perpetually late to nearly every important party over the last several years, it should be noted that in the case of Moody's and the Philippines, that is not the case. In fact, Moody's raised its outlook on the Philippines to positive in May 2012. In October, the ratings boosted its rating on Philippine debt to Ba1, one level below investment grade territory. Last June, 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. Those actions were precursors to the obvious: An investment-grade credit rating. Last month, EPHE soared when Fitch Ratings upgraded the Philippines' long-term, foreign currency-denominated debt to BBB- from BBand the long-term local currency-denominated debt to BBB from BBB with stable outlooks on both ratings. In other words, the Moody's Analytics report published Wednesday may not tell investor that actively follow the Philippines and EPHE anything they do not already know. However, the report does reiterate some of the pillars of investing in an ETF like EPHE. One being that the lone Philippines ETF has been a juggernaut among emerging markets funds at a time when key export markets such as the U.S. and China have been home to fragile economic recoveries. More importantly, if the growth trends continue, the Philippines could see GDP growth of eight percent by 2016, according to Moody's Analytics. "This impressive rate of GDP [gross domestic product] growth [last year] looks sustainable, as risks are low and most sectors of the economy are growing solidly. We expect GDP growth to remain in the 6.5 to 7-percent range in 2013 and 2014, making the Philippines one of the world's fastest-growing economies," said the research firm. As has been previously note, one reason for EPHE's stunning move higher is the real story about the Philippines economy. That being the one where the country is not intimately dependent on exports to China as many other countries in the region are. China is the third-largest trading partner for the Philippines behind Japan and the U.S. Moreover, the Philippines is taking an important page from the Indonesian economic playbook: A focus on domestic consumption. Buoyed by the Philippines' status as the world's largest call-center destination and the fact that Filipinos, broadly speaking, are good English speakers, the country has been able to attract some higher-wage, high-skill jobs that are not all export-related. That has helped facilitate robust domestic demand while damping the country's exposure to export sensitivity. Standard & Poor's commented on the topic in its own report. "China and the Asean 5—Indonesia, Malaysia, Philippines, Thailand and Vietnam—are more domestically driven and, therefore, continue to enjoy relatively high and stable growth rates. This is not the case elsewhere," the Philippine Inquirer reported, citing the S&P report. Importantly, S&P noted in the report that Japan's weak yen could actually help, not hinder, the Philippines because the country is a net importer of Japanese goods. On that front, it is important to remember at least two things. First, EPHE was surging long before Japanese Prime Minister Shinzo Abe and Bank of Japan Governor Haruhiko Kuroda came to town. Second, the correlation of EPHE to major Japan ETFs is low enough to argue Japan has little impact on Philippine equities. For more on Asia ETFs, click here.