Foreign investors return to the Philippines

“Global stock investors are taking a fresh look at the Philippines, and they like what they see,” says Minoru Satake in the Nikkei Asian Review.

The Philippines Stock Exchange Index (PSEi) suffered a volatile 2013 as foreign investors began bailing out of emerging markets everywhere on the back of the US Federal Reserve’s announcement that it would wind down its quantitative easing policies.

But an eye-catching economic performance – GDP grew at 7.2% last year – is starting to lure overseas investors back.

Foreigners have been net buyers of Philippines shares every week since early February and have accounted for around half of all trading this year. The PSEi has risen more than 16% since the beginning of January and confidence is high.

It’s quite a turnaround for what used to be a “laggard” stock market, says Assif Shameen in Barron’s – but deservedly so. The Philippines has undergone significant changes since Benigno Aquino became president four years ago and immediately embarked on a programme of economic reforms and anti-corruption measures.

Today, it is viewed in a much more favourable light internationally and its strengths are widely recognised. These include “the most favourable demographics in Asia”, “a dynamic, literate, English-speaking workforce”, relatively low debt, a big external surplus, fast-growing services, andbanks with a loan-to-deposit ratio of just 60%.

The economy should continue expanding at a healthy pace in 2014, say analysts at Singaporean bank DBS. Growth of 6.5% should be achievable. Whether this will be sustained over the longer term depends on whether the government manages to boost infrastructure spending to remove bottlenecks, but the signs are positive.

So the fundamentals remain encouraging. The main concern is that it is now “the most expensive market in Asia”, on a forecast price/earnings ratio of more than 18. At valuations like these, some caution is needed.

But MoneyWeek is still inclined to give the market the benefit of the doubt, given the Philippines’ considerable potential. There are still significant risks, but a small investment in a fund such as the db x-trackers MSCI Philippines ETF (LSE: XPHG) looks a good long-term bet.