Southeast Asia’s best performing stock market

The benchmark index in the Philippines, the PCOMP, has gained around 25% this year, making it the region's best performer. The latest boost came from an upgrade by ratings agency Standard & Poor's. The country's debt is now just one notch below investment grade, an important seal of international approval for emerging markets.

The economy, once largely based on remittances from the diaspora and agriculture, is humming along at a 6% annual growth rate. It has been bolstered by recent deregulation and a growing presence in high-tech manufacturing and outsourcing, a trend underpinned by a skilled and well-educated workforce.

Faster growth has helped reduce public debt, which is down from 70% of GDP a decade ago to 40% now. A current-account surplus and a solid cushion of foreign-exchange reserves have reduced the Philippine's vulnerability to money fleeing the country amid a global financial crisis. Inflation is under control at 3.5%.

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The economy is among the least exposed to external trade in the region, with 30% of GDP stemming from goods and services exports, as Lombard Street Research points out. It has the potential to boost domestic demand since it has one of the youngest populations of all emerging markets.

The labour force is set to grow by 23 million by 2030. Only India and Indonesia will do better demographically. Throw in its lack of exposure to the commodity cycle, and it looks well placed to keep growing amid a lacklustre global backdrop.

But "investors are so bullish" they may be ignoring the country's "structural sins", says Luz Lorenzo of Maybank ATR Kim Eng Group. A key worry is the struggle to raise revenue. Despite a clampdown on tax evasion, tax revenues as a share of GDP have barely budged, says Jeremy Grant in the FT. Previous reform efforts have taken ages to be pushed through, so investors may be overestimating the impact of a government drive to improve the country's infrastructure with the help of the private sector.

The market is also no longer cheap on a price/earnings ratio of 18, and is susceptible to shaky global sentiment. So stocks seem unlikely to get much higher for now. However, the encouraging long-term outlook may make the US-listed ETF tracking the MSCI Philippines Investable Market index (EPHE) worth exploring.