Philippines GDP Growth Exceeds Expectations: ETFs In Focus

Philippines witnessed impressive economic growth in the third quarter of 2017. Per the National Statistics Agency, GDP grew 6.9% year over year in the third quarter compared with 6.7% in the prior quarter and 7.1% in the year-ago period. It also beat a Bloomberg forecast of 6.6%.

Philippines has been one of the best performing economies in Asia so far this year. Growing exports and increased government spending contributed to GDP growth. Government spending increased 8.3% year over year.

Consumer prices increased 3.5% year over year in October, a three-year high, bringing the average inflation so far this year to 3.2%. The figure also came in within the central bank’s target range of 2-4%. Owing to robust growth and inflation remaining in the target band, the central bank has maintained a neutral stance on monetary policy since September 2014.

Risks Involved

The peso has been one of the worst performing currencies this year. This might add pressure to inflation and force the central bank to tighten monetary policy in the near future.

Moreover, consumer spending has been declining. It increased 4.5% in the third quarter, the slowest pace since 2010, per Bloomberg.

Foreign investment plays a pivotal role in determining the economy’s success. However, president Rodrigo Duterte's deadly war on drugs might force foreign investors to flee.

Duterte’s tax reform bill is expected to give a boost to tax revenues in order to fund his goals of infrastructure expansion. The administration has promised to increase infrastructure spending to 7.4% of GDP by 2020. Moreover, the government expects consumer spending to grow as a result of the tax reform. However, there is still high uncertainty with regard to the same.

Let us now discuss the most popular ETF focused on providing exposure to Philippine equities.

iShares MSCI Philippines ETF EPHE

This fund seeks to provide exposure to Philippine stocks primarily in the large-cap segment.

It has AUM of $174.2 million and charges a fee of 64 basis points a year. From a sector look, Financials, Real Estate and Industrials are the top three allocations of the fund, with 25.7%, 24.3% and 24.0% exposure, respectively (as of Nov 15, 2017). Ayala Land Inc, SM Prime Holdings Inc and BDO Unibank Inc are the top three holdings of this fund, with 9.6%, 9.5% and 8.6% exposure, respectively (as of Nov 15, 2017). The fund has returned 13.7% year to date and 13.3% in a year (as of Nov 16, 2017).

We will now compare the fund’s performance to a broader South East Asia based ETF, ASEA.

Global X Southeast Asia ETF ASEA

This fund provides broad exposure to the five members of the Association of Southeast Asian Nations, namely Singapore, Indonesia, Malaysia, Thailand and the Philippines. It is appropriate for investors looking for a diversified exposure to South East Asia (read: What Lies Ahead for Singapore ETFs?).

ASEA is less popular with AUM of $15.9 million and charges a fee of 65 basis points a year. From a geographical perspective, the fund has 30.1% exposure to Singapore, 22.2% to Malaysia, 22.1% to Thailand, 19.2% to Indonesia and 6.5% to the Philippines (as of Sep 30, 2017). Financials, Telecommunication Services and Industrials are the top three sectors of the fund, with a 46.2%, 14.8% and 8.3% allocation, respectively (as of Sep 30, 2017). DBS Group Holdings Ltd, Oversea-Chinese Banking Ltd and United Overseas Bank Ltd are the top three holdings of the fund, with an 8.0%, 7.2% and 6.0% allocation, respectively (as of Nov 15, 2017). The fund has returned 26.6% in a year and 25.8% year to date (as of Nov 16, 2017).

Below is a chart comparing the year-to-date performance of the two funds.

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