What caught my eye v.53Philippines shelter;CBs calling E.T

In our latest issue, we review the case for remaining O/W Philippines. We also ask why central banks (CBs) invariably blame international volatility for setbacks.

Philippines - “shelter in a storm”? For some time, we have contemplated whether we should maintain an O/W position in the Philippines (together with India, it constitutes our largest overweight). It was a rewarding experience to maintain an O/W for at least three years (until late’15). The market benefited from a significant multiple re-rating, which was justified by improving governance and tentative structural reforms and a number of external factors (decline in commodities; rise in remittances and BPO). As a result, Phil has enjoyed the best period (since the ‘70s) of strong/stable growth rates with contained inflation. Investors also benefited from rising productivity whilst external vulnerability scores have gone from among the riskiest to one of the “safest” in EM universe.

However the reform agenda has largely stalled and political uncertainty is mounting in the run-up to elections. The collapse in commodity prices, while improving competitiveness, is starting to threaten remittances (~9% of GDP) and voice IT-BPO is slowing into single digits, while the country remains exposed to electronics. The Philippines also continues to under invest (non-residential construction and machinery) and the national savings rate remains too low to raise investment whilst containing external vulnerabilities. In the absence of stronger public sector spending there is a possibility of growth reversal. Given high multiples and bullish ’16-17 EPS est. (~11-12%), it could lead to a further de-rating.