Governments around the world have been printing money and running huge budget deficits for the last seven years. Policymakers’ actions have greatly inflated the prices of stocks and other assets. Sooner or later, this bubble must surely burst.
Emerging markets are supposedly the most threatened, largely because any credit crunch would stifle their funding.
Yet there’s one emerging market that runs a balanced budget, has avoided monetary stimulus, is growing rapidly, and has a balance of payments surplus that should insulate it against another financial crisis.
That happy country is the Philippines.
The International Monetary Fund (IMF) estimates that Philippine real GDP will grow 6.7% in 2015 and 6.3% in 2016, following an average growth rate of 6.3% annually from 2010 to 2014. Even with population growth of 1.8% per annum, that sort of growth rate makes a country richer quite quickly.
Now, that level of growth is also typically accompanied by inflation and a huge balance of payments deficit as the government, seduced by all the money sloshing around, loses control of spending. But that’s not happening in the Philippines.
The country’s 2015 budget deficit is estimated by The Economist’s team of forecasters to be 1.9% of GDP, which, given the country’s economic growth, means public debt levels will decline as a percentage of GDP.
What’s more, the IMF estimates that the Philippines will run a current account surplus of more than 5% of GDP in both 2015 and 2016.
Looking for countries to run balance of payments surpluses has gone out of fashion since the days of the mercantilist Thomas Mun (1571-1641, author of England’s Treasure by Foreign Trade). However, in a world of sloppy monetary policies and periodic credit crises, it makes sense.
When the bubble bursts, the Philippines’ stock market will crash alongside the rest of the world’s markets… but the exchange rate should remain pretty stable, and neither the Philippine government nor the country’s major companies should require emergency bailouts. Ultimately, that will preserve long-term shareholder value.
Three Investment Opportunities
After a lengthy dictatorship dating to 1986, the Philippines has had steadily improving governments. The current president, Benigno Aquino, is the son of former President Cory Aquino, and he has pursued relatively free-market policies.
While there’s an election due next year (for which Aquino can’t run), policy continuity seems quite likely. Thus, it’s worth considering a modest investment in the Philippines right now. You might consider one of the following:
1) The iShares MSCI Philippines ETF (EPHE) seeks to track the performance of the MSCI Philippines Investable Market Index, which has returned an average of 15.7% per annum over the last 10 years in dollar terms. That’s the best performance of any broad country index, and at 19x price to earnings, it doesn’t seem overvalued. EPHE provides a modest dividend yield of 0.9% and has an expense ratio of 0.62%, which is satisfactory given the illiquidity of some of its holdings. Its top 10 holdings cover a broad spectrum of the Philippine economy.
2) Manila Water Company (MWTCY) serves a population of about six million in Manila and surrounding cities. MWTCY trades at a modest trailing P/E of 10.2x and paid a dividend of 0.81 pesos in 2014 (each ADR trading in the United States represents 25 shares, so that’s equivalent to $0.455 per ADR, a yield of 3.1%). Earnings for this very stable business trend gently upwards, with analysts expecting a roughly 8% increase for 2015. Manila Water is part of the giant Ayala Group and has international expansion plans in Vietnam. Through its affiliate, Saigon Water Infrastructure Co., MWTCY plans to supply water to Ho Chi Minh City.
3) With approximately 70 million subscribers, Philippine Long Distance Telephone Company (PHI) is the dominant telecom provider, both wireless and landline, in the Philippines. It also has a joint venture with Rocket Internet AG to develop online payment solutions. PHI trades at a P/E of 18x, with earnings trending gently upwards. It also carries a juicy yield of 4.5%, so this is the best Philippine buy for income investors. However, Philippine withholding tax is 30%, so you need to hold it in a taxable account to resolve the Philippines/U.S. double-tax treaty.