Philippine stocks hit an all-time high

Few markets are hitting new all-time highs these days, but the Philippines is an exception. The PCOMP (the benchmark index) has risen by almost 10% over the past two months and was Asia's top-performing market in 2011. Global investors are pouring in at a record rate, says Bloomberg.

What's the appeal? Investors recognise that the economy has been "revolutionised" over the past few years, says Walter Molano of BCP Securities. The country used to depend on military aid, remittances from overseas, and agricultural production. Now it has finally begun to exploit a "home-grown advantage": its highly skilled workforce.

It has thus established a major presence in high-tech manufacturing much of the external hard drive industry is dominated by the Philippines, for instance and services, with outsourcing a key strength. Last year it eclipsed India as the world leader in business support functions. Meanwhile, remittances from abroad have kept its current account in the black.

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Deregulation, a clampdown on corruption, and plans to increase spending on infrastructure have also impressed investors. GDP grew by 7.4% in 2010 and almost 5% last year. In 2010, the economy was ranked 43rd in the world, says Molano, but it is expected to leap into 18th place in less than four years.

But can the market's run endure? There is scope for interest rates to fall amid slowing growth, but like the rest of the region, it won't be able to shrug off a downturn in the developed world. According to a recent study by Deutsche Bank, a 1% reduction in GDP growth in the EU and America eventually feeds through into a GDP slide of just over 1% in the Philippines. Almost half of the country's exports go to the EU, America and China, in that order.

The credit crunch in Europe will temper capital inflows as banks retrench. Wayne Arnold notes on Breakingviews that European banks accounted for over half of East Asia's foreign debt last June. Note too that earnings projections look optimistic, says Deutsche Bank, and the market isn't cheap on a price/earnings ratio of 17. It all suggests that the index is unlikely to move decisively beyond its record for some time.