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The Philippines: An Asian Favorite
03/26/2015 10:00 am EST
Our latest recommendation is a bet on an Asian market that I expect to be 2015’s global stock market star—the Philippines—suggests global expert Nicholas Vardy, editor of The Alpha Investor Letter.
Morgan Stanley analysts believe the Philippines is the best-positioned stock market for 2015 in all of Asia, thanks to ample global liquidity, strong economic growth, and double-digit percentage earnings growth at Philippine companies.
Much like the US stock market, the Philippines has been one of the world’s top-performing stock markets since 2008. In fact, the benchmark stock index has risen in each of the past six years to quadruple during that period.
The Philippines is one of Asia’s fastest-growing economies. This year, the Philippines’ stock market looks to extend its six-year winning streak. The stock market broke out to a new all-time high in mid-January and is up 8.4% so far in 2015.
In terms of its level of development, the Philippines is at a sweet spot, where strong growth can be maintained for many years before it hits the “middle income trap” of around $10,000 to $12,000 per year.
The Philippines also boasts a government committed to a business-friendly set of policies. Last year, Standard & Poor’s upgraded the country’s rating to a notch above investment grade, the highest rating ever for the country.
Like many of its Asian neighbors, the Philippines is a net importer of oil. With its reliance on crude imports remaining above 90%, the Philippines is a clear winner from the collapse in oil prices. Companies will see their costs reduced and local consumers will have more cash to spend.
For all of the recent bullishness surrounding the Philippines, investors with longer memories recall that previous periods of economic optimism in the Philippines have fizzled out.
The iShares MSCI Philippines ETF (EPHE)—launched in 2010—rallied 22% in 2014 even as fears of a rate increase by the Fed sparked volatility globally late in the year. Investors worldwide invested a net $1.3 billion into Philippine stocks last year.
Overall, 2015 is looking to be a very good year for the economy and the stock market there. The Philippine Stock Exchange index broke through to record highs in January, although not in US dollar terms, because of the soaring greenback.
Nevertheless, investors are paying up for this optimism, as Philippine stocks are expensive. The market trades at more than 19 times earnings forecast for the coming year, above its five-year average of 16.4, according to HSBC research.
Finally, the Philippines doesn’t have the negative risk from currency volatility that countries like Indonesia do.
The Philippine peso has remained relatively stable, while in neighboring Indonesia, which runs a current-account deficit, the Indonesian rupiah fell against the US dollar. So buy the iShares MSCI Philippines ETF.
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