Despite Good News, Philippines ETF Flirts With Correction

The iShares MSCI Philippines Investable Market Index Fund EPHE, the ETF that has ascended to juggernaut status among emerging markets funds over the past 18 months, has been surprising investors in the latter part of May. The surprise has not been good.

Despite continued positive news flow pertaining to the rapidly growing Southeast Asian economy, EPHE is down 9.3 percent since May 14 when factoring in Thursday's almost 3.1 percent decline. By definition, a security enters correction territory when it falls 10 percent from its most recent peak and EPHE is dangerously close to being tagged with the ominous "correction" label.

Philippines bulls may be able to spin the current state of affairs for EPHE as a long awaited buying in the ETF. Thursday's tumble stands as one of the ETF's worst one-day performances in months. Additionally, EPHE's dour two-week performance is its worst since the third quarter of 2011.

It is not as if the the strong fundamentals that previously buoyed EPHE have suddenly disappeared. Actually, the opposite is true. Earlier this week, Citigroup said the Philippines could be on its way to its third investment-grade credit rating this year.

Standard & Poor's boosted the Philippines to investment-grade territory early this month, following a similar move by Fitch Ratings in March.

"Strong revenues matched by upbeat spending in April suggests a fiscal bias that remains expansionary with or without the revenue surprise," said Citi. "Alongside firmer fiscal contribution to growth, the year-to-date fiscal performance bodes well for Moody's credit risk assessment that in our view could eventually result in a rating upgrade in the third quarter of 2013." The Citi research was cited in a piece by Business World Online.

Then on Thursday, the Philippines said its first-quarter GDP grew 2.2 percent on a quarterly basis and 7.8 percent year-over-year. That makes the Philippines the fastest growing economy in Asia as it pushed past China's 7.7 percent annual pace and 1.6 percent quarterly growth, according to Reuters.

Although per capita GDP surged 6.1 percent, the issue markets may be focusing on is a March unemployment rate of 7.1 percent coupled with the fact that the country cannot create jobs at a fast enough clip to match the soaring number of new entrants to the labor force.

Another issue is the continued focus on Philippines exports amid a slowing global economy. The assertion is not without merit, but it also ignores the fact that the Philippines has a taken a page from Indonesia's playbook and focused on its domestic economy. Due to a workforce that is highly educated and chock full of proficient English speakers relative to other developing economies, the Philippines has surpassed India as the top destination for global call centers. Business process outsourcing could be a $25 billion industry in the Philippines by 2016, Benzinga noted earlier this year.

Or maybe the issue for EPHE recently has been perceived correlations of Philippine equities to China, Japan or the broader emerging markets universe. In either case, the assumption is flawed. In the past year, EPHE's correlations to the iShares MSCI Emerging Markets Index Fund EEM, the iShares FTSE China 25 Index Fund FXI and the iShares MSCI Japan Index Fund EWJ are as follows: 0.46, 0.38 and 0.33, according to iShares data.

The best advice with EPHE may sound trite, but could prove efficacious: Let the weak hands be shaken out and stalk an entry point below $40.

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