They say things happen in threes, but that is not always the case when it comes to the major ratings agencies. The Philippines is a prime example of that. Earlier this year, Fitch Ratings gave the fast-growing Southeast Asian nation an investment-grade rating. Standard & Poor’s followed suit soon after, but it was not until Wednesday night that the trifecta was completed.
That is when Moody’s Investors Service upgraded Philippines by one notch to Baa3 from Ba1. The new investment grade rating has a positive outlook and the move by Moody’s could put the spotlight on the once high-flying iShares MSCI Philippines ETF (NYSEArca: EPHE). [Philippines ETF Gains on Rating Upgrade]
Bolstered by a young population, most of which have solid English language skills, the Philippines has surpassed India as the business process outsourcing capital of the world. While investors dumped emerging markets ETFs through the first two quarters of this year due to slowing growth, the Philippines has continued to string together one impressive quarterly GDP report after another.
“The Philippines’ economic performance has entered a structural shift to higher growth, accompanied by low inflation. Real GDP expanded by 6.8% in 2012 and 7.6% year-on-year in the first half of 2013. These levels are among the fastest rates of growth in Asia-Pacific and across emerging markets globally,” said Moody’s.
Still, EPHE has been riddled with selling pressure over the past six months as investors speculated Philippine equities would be just as vulnerable to the loss of U.S. easy money as stocks in Indonesia or Malaysia. Over that time, EPHE is off 13.2%. That is better than the 23.2% loss for the Market Vectors Indonesia ETF (NYSEArca: IDX), but far worse than the 1.3% gained by the iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
While the Philippines is frequently measured against other Southeast Asian markets, prompting comparisons between EPHE and ETFs like IDX, that are distinct differences that may have been overlooked during the ETF’s recent downdraft. For example, the Philippines’ external balance sheet is strong and its external financing needs lower than comparable markets. The country also has a current account surplus while the likes of Indonesia are suffering because of deficits. [Good News For Philippines ETF]
“The factors that prompted the review remain intact, namely the sustainability of the country’s 1) robust economic performance; 2) ongoing fiscal and debt consolidation; and 3) political stability and improved governance.
“In addition, the stability of the Philippines’ funding conditions — during the recent bout of market volatility in emerging markets — points to the country’s relative lack of vulnerability to external financial shocks, such as those arising from anticipated tapering by the US Federal Reserve of its quantitative easing policy,” said Moody’s.
News of the Moody’s credit rating upgrade could also benefit some bond ETFs. The iShares Emerging Markets High Yield Bond ETF (NYSEArca: EMHY) has an 8.2% weight to the Philippines. The actively managed WisdomTree Emerging Markets Local Debt Fund (NSYEArca: ELD), which has an effective duration of just 2.5 years, has a 3.2% Philippines weight. Another actively managed ETF, the WisdomTree Asia Local Debt ETF (NYSEArca: ALD), has a 5.6% allocation to the Philippines.
iShares MSCI Philippines ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of EEM.