Investing In The Philippines: Escape The U.S. With A Low-Debt, Low-Inflation Economy (IDX, THD, EPHE)

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September 28, 2012 12:31pm NYSE:EPHE NYSE:IDX

Money Morning Staff: Along with its various countries and economies, the Asian investment thesis has certainly evolved over the years. 

Those born in the 1960s and 1970s surely remember the 1980s when Japan’s economy rose to global prominence, showing the world that at least at that time, Japan truly was the land of the rising sun.

The Asian financial crisis struck in the late 1990s, but that even only temporarily chased Western investors away from the continent. Caution would give way to ebullience earlier this century as investors became enamored by the Chinese and Indian growth stories.

Flush with statistics about that pair representing two of the fastest growing economies in the world and that one or both would one day pass the U.S. in terms of economic heft, investors were once again seduced by Asian opportunities.

Renewed appetite for Asian exposure coincided with another boom, that of the exchange-traded fund (ETF) industry. As the Chinese and Indian economies became juggernauts, ETF sponsors have met investor demand for exposure to these countries coming up with everything from ETFs focused on Chinese technology companies to Indian small-caps.

ETF issuers did not stop there. As investors clamored for ways to access other Asian markets, ETF sponsors obliged.

In other words, the Chinese and Indian growth stories gave way to the burgeoning economies of Indonesia, Thailand and others. Since the March 2009 market bottom, the iShares MSCI Thailand Investable Market Index Fund (NYSEARCA:THD) and the Market Vectors Indonesia ETF (NYSEARCA:IDX) have been two of the best performing ETFs of any kind.

Those funds are still performing well, but a case can be made there is a new sheriff on the Asian investment block.

Investing in Philippines

EPHE: More to the Story The Philippines, a Southeast Asian nation comprised of thousands of islands, is not completely unknown to Western investors, but the economy there is smaller comparable nations such as Indonesia, Malaysia and Thailand.

A fair assessment might be to say the country is just starting to shed its under-the-radar status.

That much is proven by the iShares MSCI Philippines Investable Market Index Fund (NYSEARCA:EPHE), almost certainly the best way for U.S. investors to tap into the Philippine investment thesis without incurring unnecessary single stock risk.

Actually, there are not many Philippine American depositary receipts available, so EPHE is the best way to access the Philippines. Period.

EPHE debuted two years ago and now has over $101 million in assets under management, a sum that indicates investors have at least been intrigued by what the Philippines has to offer.

Those investors have not been disappointed.

EPHE is up 28.5% year-to-date, making it one of the best funds tracking any individual country in any region of the world.

EPHE’s performance does not paint the entire picture about the Philippine economy.

Arguably, when the various statistics are weighed together, one might wonder why the ETF has not performed even better and why allegedly smart economists and institutional investors are not embracing the Philippines to a larger extent.

Inflation is benign in the Philippines. That is something India cannot say.

Even Thailand has struggled with rising prices at various points in recent years. The Philippines could notch GDP growth of 6% this year and the country is well on its way to meeting or exceeding that number after posting growth of 6.1% in the first half of the year.

Then there is a fact about the Philippines that would make many Americans and Europeans gasp in disbelief: The country could be debt-free in a few years.

Currently sitting on a debt-to-GDP ratio of 50%, one the U.S., Japan and the Eurozone would die for, government spending is less than 19% of GDP.

Buoyed by $76 billion in international reserves, the Philippines’ external balance sheet is nothing short of impressive. Standard & Poor’s, the ratings agency that is notoriously slow on the uptake, still has a junk credit rating on the Philippines, though it is BB+, the highest non-investment grade rating. S&P upgraded the Philippines in July and the country’s BB+ rating is its highest since 2003.

Adding to the bull case for the Philippines is a favorable slate of country rankings. Data from the Heritage Foundation indicate that when metrics such as economic freedom, freedom from corruption, land freedom and related metrics are combined, the Philippines scores better than other Southeast Asian economies such as Indonesia and Vietnam. The Philippines also tops Greece, China, India and Russia.

Note to investors: One or two nice statistics here or there do not mean any country’s investment thesis is perfect, the Philippines included, so don’t throw all your money into EPHE.

The country has strides to make on the corruption front, corporate legal reform is essential and the country’s rate of poverty is high, even for a developing nation. Those factors should not be ignored, but the totality of the Philippines economic story indicates its (EPHE’s) best chapters have yet to be written.

Written By The Money Morning Staff

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