The iShares MSCI Philippines ETF (NYSEArca: EPHE) is up nearly 16% year-to-date, less than half the returns offered by the MSCI Emerging Markets Index. However, the Philippines exchange traded fund got some good news last week thanks to a credit ratings upgrade.
Fitch Ratings upped its rating on the Philippines to BBB from BBB- with a stable outlook.
Strong and consistent macroeconomic performance has continued, underpinned by sound policies that are supporting high and sustainable growth rates,” said Fitch. “Investor sentiment has also remained strong, which is evident from solid domestic demand and inflows of foreign direct investment. As such, there is no evidence so far that incidents of violence associated with the administration’s campaign against the illegal drug trade have undermined investor confidence.”
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 $176.2 million EPHE tracks the MSCI Philippines Investable Market Index and holds 42 stocks. EPHE debuted over seven years ago and remains the only dedicated to Philippine equities.
“The Philippines has also maintained fiscal policies geared towards a sustained decline in the gross general government debt (GGGD) ratio,” adds Fitch. “GGGD is projected by Fitch to decline to around 34% of GDP at end-2017, below the ‘BBB’ median of 41.1% of GDP. The recent appointment of a new central bank governor from within the Bangko Sentral ng Pilipinas (BSP) has provided continuity and supports monetary policy credibility. We expect inflation to remain within the BSP’s target range of 2%-4%. A continuation of exchange rate flexibility should help preserve the recent build-up of foreign exchange reserves.”
EPHE allocates 28.5% of its weight to financial services stocks and almost 24% to real estate names. The industrial sector is 23.5% of the fund’s weight.
“Fitch expects the Philippines’ fiscal profile to improve as a result of the government’s tax reform initiative,” said the ratings agency. “The House of Representatives and Senate have passed their respective versions of the first component of a five-part comprehensive tax reform programme, which may be signed into law before the year’s end. We estimate the bill to be net revenue positive, reflecting an expansion of the VAT base and higher taxes on petroleum products, automobiles and on sugar sweetened beverages, which would more than offset a lowering of personal income taxes.”
For more information on the Philippine market, visit our Philippines category.