The iShares MSCI Philippines ETF (NYSEArca: EPHE) is up 5.55 year-to-date, which sounds decent until compared to the MSCI Emerging Markets Index. The widely followed emerging markets benchmark is up 13.4% and there could be more reasons coming to lengthen the laggard status of Philippine equities.
President Rodrigo Duterte is a big reason why EPHE is lagging its counterparts and why some global investors are skittish about Philippine equities. Additionally, the country’s currency, the peso, is seen as weak relative to other emerging currencies.
Last year, the Philippine presidential race weighed on investor sentiment as Rodrigo Duterte had been tight-lipped on what he would do to support the economy, fueling uncertainty over the economic outlook. In the weeks before the election, investors dumped Philippine equities, expressing uncertainty over Duterte’s economic plans and lack of policy-making experience, reports Lillian Karunungan for Bloomberg.
“The peso – down nearly 8% in that time – is buckling under the weight of a chaotic and distracted administration with little time for economic reforms. Lots of body bags – more than 8,000 and counting – but no big wins on attacking poverty, increasing job growth or improving infrastructure. Now, those bodies, casualties of Duterte’s war on drugs, are fueling impeachment talk in Manila,” reports William Pesek for Barron’s.
Philippine stocks currently traded at a slightly higher multiple than their Thai counterparts and are about inline with Indonesia, two markets against which the Philippines is frequently compared.
Political volatility, which previously has not been a problem during EPHE’s lifetime, could be an issue for the ETF this year.
“There’s still time for a presidency course correction. But Duterte must act fast, and convincingly. In September, just 83 days into his term, Standard & Poor’s threatened Manila’s credit rating, warning about policy unpredictability and a drug war that “could undermine respect for the rule of law and human rights,” according to Barron’s.
Duerte has overtly fired back at the ratings agencies, a strategy previously employed by other emerging markets leaders to no avail.
There is one benefit of the weaker peso: Foreign remittances are now worth more when converted into pesos, helping boost the local economy.
For more information on the Philippine market, visit our Philippines category.