Under The Hood: Fun With The Philippines

The amount of attention paid to the Philippines investment thesis has increased a bit in 2012. As it should have, but the iShares MSCI Philippines Investable Market Index Fund EPHE, the lone ETF devoted to the rapidly growing Southeast Asian nation, still remains an enigma to many U.S. investors. The iShares MSCI Philippines Investable Market Index Fund will celebrate its second birthday in late September and its still short lifespan, the fund has managed to accumulate over $119.5 million in assets under management, indicating that investors are indeed looking for Asia ETF options that do not include China and India. On the surface, the Philippines and, by virtue, EPHE, may strike some investors as riskier bets than China or even Indonesia and Thailand. That might be because the country has junk status with Fitch, Moody's and Standard & Poor's. A ratings upgrade or two could be on the way in the near-term. "Barring unforeseen policy or political setbacks, we conclude that a near-term agency re-rating is more likely than a prolonged disconnect between the Philippines' risk spreads and its sovereign rating," the Australia and New Zealand Banking Group said in in a recent note. "Accordingly, if agency ratings improve toward investment-grade level, the Philippines could benefit from a broader investor base and, in particular, larger direct investment inflows." Maybe he's a little biased, but the country's chief economic manager said in late March the Philippines "is the most underrated country in the world" and that the country's current rating is four notches below where it should be. Take the reluctance of ratings agencies to upgrade the Philippines with a grain of salt. After all, S&P hasn't gotten around to lifting Indonesia out of junk status. The important takeaway is that the Philippines banking system is viewed as strong and that's a good thing for EPHE because almost 39.3% of its weight is devoted to financial services stocks. Another 19% goes to industrials while almost 15% goes to utilities. Another 10.4% goes to consumer staples and telecom lands an allocation of 9.6%. That leads to a surprisingly low beta of 1.09, according to iShares data. In other words, EPHE's beta is much lower than the iShares FTSE China 25 Index Fund's FXI, the iShares MSCI Brazil Index Fund's EWZ and the iShares MSCI Thailand Investable Market Index Fund's THD, just as a few examples. Looking at price/earnings ratios, EPHE is currently more expensive than FXI and the iShares MSCI Indonesia Investable Market Index Fund EIDO, but investors should note they're paying for potential with the Philippines. Potential for the economy to benefit as the government moves to lift more of its citizens out of poverty. Potential for foreign direct investment to increase. Potential for credit ratings upgrades. In addition to the potential catalysts, there are the already realized factors that make EPHE worthy of consideration. A current debt-to-GDP ratio of around 50%. Controlled inflation relative to many other emerging markets. Then there is the World Bank GDP growth forecast of 4.2% this year and 5% in 2013. Indeed, it's easy to see why EPHE commands a higher valuation and currently trades at a 52-week high. For more on investing in the Philippines, please click HERE.