Next Year Could Be Another Rough One For This EM ETF

Heading into the start of this year, plenty of forecasters posited that if emerging markets equities were to rally or even just turn in steady performances, the leadership would come from Emerging Asia, including the Philippines.

Indeed, the iShares MSCI Philippines ETF EPHE, the lone exchange traded fund dedicated to the Philippine equities, has outperformed the MSCI Emerging Markets Index. However, that is not saying as much as EPHE is down 12.5 percent this year while the emerging markets benchmark has tumbled 16.3 percent.

That is a disappointing showing for an ETF once viewed by investors as one of the jewels (and strongest) among single-country emerging markets funds. There was a time when investors prized the Philippines' current account surplus and saw the country as one of a small amount of emerging markets beneficiaries of the stronger U.S. dollar due to the large amount of dollar-denominated remittance from the U.S. to the Philippines. 

Investors' enthusiasm for EPHE and Philippine equities has waned and some believe 2016 will bring more of the same for the Southeast Asian nation's equity market, which is headed for its first annual loss since 2008.

BDO Unibank Inc. “expects the nation’s equities to decline in the first half of 2016 as higher U.S. borrowing costs fuel outflows and uncertainty builds before the country holds presidential elections,” reports Bloomberg. 

Political volatility is not a factor EPHE has faced since coming to market just over five years. For all of the ETF's lifespan, the steady Aquino Administration has been in place. While the Aquino government has proven impotent at wiping out corruption, the infrastructure spending has soared while the Philippines enjoyed some of the best GDP growth rates in the developing world on its way to earning investment-grade credit ratings from the major ratings agencies.

Investors are not showing a willingness to embrace pricey Philippine stocks (the market is one of Asia's most expensive). Nor or they are enthusiastic about waiting for national elections to play out. EPHE entered 2015 with $331 million in assets under management, but that number has since dwindled to less than $245 million.

“Foreign investors, who are on course to be net sellers of local stocks this year for the first time since 2008, are likely to withdraw more funds in the first half, BDO Unibank's Frederico Ocampo said. While stocks could rise in the short-term after the Fed’s interest-rate increase last week, more outflows would help stocks reverse gains, said Ocampo, who favors stocks with high dividend yields,” according to Bloomberg.