The “Duterte discount” in the Philippines

Once widely dubbed “the sick man of Asia”, the Philippines has turned into another Asian tiger, says Karl Lester Yap on Bloomberg. The World Bank thinks the economy will grow by more than 6% a year in the eight years to 2019.

So what’s gone right? Former president Benigno Aquino curbed corruption, improved the tax-revenue collection system, and tackled overspending and borrowing. The government owes 42% of GDP, down from 70% in 2003. A well-educated, English-speaking population has carved out a niche for itself in business process outsourcing (back office administration) and high-tech manufacturing. The young 100-million-strong population  is fuelling consumption, which accounts for 70% of GDP. So the economy is less exposed to the global business cycle than its regional peers.

Despite the auspicious backdrop, the stockmarket is “suffering from a presidential discount”, as Lisa Jucca puts it on Breakingviews. It deserves to trade at a premium to the region given the fundamentals, but is on a similar valuation. The populist, capricious president, Rodrigo Duterte, has declared a war on drugs, which has claimed around 7,000 lives while he has appeared to condone vigilantism. Martial law to combat Islamists in the south is also unnerving investors.

Nevertheless, the erratic leader has at least stuck to his word in one respect, says Capital Economics. He has delegated responsibility for economic policy to his finance minister, “who in turn has pushed through some useful reforms”. A reform bill trimming income taxes and raising corporate and indirect levies is working its way through parliament.
This should raise another 0.9% of GDP in tax revenues.

That in turn will facilitate government plans to raise spending on infrastructure without breaching the 3% of GDP deficit target. Investment is supposed to rise to 7.4% of GDP by 2022, compared with just 5.4% this year.

Will the Philippines’ compelling long-term prospects continue to be overshadowed by Duterte’s behaviour? Foreign investment will be key, says Capital Economics: inflows into local assets have slowed and pledges of foreign direct investment have declined. But Duterte won’t be there forever and the country’s potential will prompt many to give it the benefit of the doubt. One way to invest is the db x-trackers MSCI Philippines ETF (LSE: XPHG).

Tech leads emerging markets

“It is risk-on time for emerging markets,” says Jonathan Wheatley in the Financial Times. The MSCI Emerging Markets index has bounced by 23% this year. Emerging markets are a geared play on global growth. A recovery in Europe and solid growth in the US have both underpinned export growth in Asia, which accounts for two-thirds of the index.

What investors may not appreciate, however, is the extent to which emerging markets are no longer simply a commodities and trade story. Since November 2014, the weight of tech stocks has eclipsed that of energy and materials. The IT sector, at 26%, is now the biggest in the index. Big names includes Chinese Internet giants Alibaba and Baidu, semiconductor group TSMC of Taiwan, and Korea’s Samsung.

So “hardware, as well as internet enthusiasm, is driving this rally”, says Jennifer Hughes in the same paper, and there is scope for further gains despite the tech sector’s near-40% jump this year. The fundamental outlook is encouraging, while emerging-market tech
is still cheaper than its US counterpart.