Based on its recent GDP numbers, the Philippines might be on track to be the hottest growth market in Asia. The Philippines recently logged 7.8% GDP growth for April, up from 7.1% in March. Both figures were seasonally adjusted, and completely exceeded analysts’ forecasts for 6.1% growth, meaning that the Philippines is now growing faster than China.
In March, the Philippines also received its first-ever investment grade rating of BBB- in March from Fitch Ratings. Fitch applauded the Philippines’ resilient economy and the improved fiscal management of the country’s deficit by President Benigno Aquino. Does this mean it’s time for American investors to look for ways to profit from the Philippines’ rapidly rising stock market, which hasrecently hit all-time highs?
Understanding the big picture
The Philippines has been well insulated from the slowdown in China, since its economy is based more on domestic consumption than exports to China, unlike other nations in the region. The Philippines is an emerging market economy, and is one of the world’s largest markets for call centers and business process outsourcing (BPO).
BPOs are the primary source of growth for the middle class, but hiring has been sluggish recently, due to poor English education programs in the country’s public schools during the 1990s. This is a stark contrast to India, where outsourcing giants such as Tata Consultancy Services Limited (NSE:TCS), Infosys Ltd ADR (NYSE:INFY) and Wipro Limited (ADR) (NYSE:WIT) have recently turned away applicants due to budget considerations. While U.S. investors can easily invest in Infosys and Wipro on the NYSE, the only way to invest in the Philippine BPO industry is through Philippine Long Distance Telephone (ADR) (NYSE:PHI), which holds significant investments in the BPO sector.
Cash remittances from overseas Filipino workers are another major industry. With over 10 million workers living abroad, the fees charged on these cash remittances have helped banks invest heavily in residential real estate, casino and shopping malls – all major growth industries powered by middle class growth.
In terms of natural resources, the Philippines has an abundance of mineral and geothermal energy resources, but much of it is untapped due to opposition from environmentalists, nationalists and the Catholic Church. This political minefield has kept large foreign energy companies at bay, and caused the country to miss out on the commodities boom over the past decade. Even though the Philippines has a large amount of arable land, much of it remains unused due to uncertainties regarding land reform. Foreign investors are also banned from investing in land. Due to these inefficiencies, the country still needs to import rice.
Electronics exports once comprised a large portion of the country’s exports. Over the past five years, China’s labor costs have risen, Vietnamese workers have remained underqualified, and Thailand’s floods have emphasized the need for diversified supply chains. These three factors have shifted the focus to the Philippines and Indonesia. Although the Philippines has an abundance of well-qualified workers, labor unions and comprehensive labor laws have kept the country uncompetitive in terms of pricing.
An easy way to invest
For most U.S. investors looking to expose their portfolios to the Philippines the easiest way is to invest in the iShares MSCI Philippines Investable Market Index ETF (NYSEMKT:EPHE), which has risen more than 50% over the past twelve months. The ETF attempts to track the performance of the Philippine stock market, and includes a wide mix of financials, industrials, utilities, telecom companies, consumer staples, and energy stocks.
AYALA CORP (OTCMKTS:AYYLF), San Miguel Corp (ADR) (OTCMKTS:SMGBY), and SM INVESTMENTS CORP (OTCMKTS:SVTMF) are among the top holdings in this ETF. Ayala is a massive family-controlled conglomerate that controls Globe Telecom, the Bank of the Philippine Islands (the nation’s oldest bank), and real estate giant Ayala Land. San Miguel, best known for its beer, is the country’s largest beverage, food and packaging company. It also holds diverse investments in heavy industries, such as utilities, mining, energy, tollways and airports. SM Investments is the country’s largest shopping mall developer.
A more focused way to invest
For investors looking for a more focused way to invest in the Philippines, the only U.S.-listed Philippine Long Distance Telephone (ADR) (NYSE:PHI) (PLDT), the country’s largest telecom company. Philippine Long Distance Telephone (ADR) (NYSE:PHI) is up nearly 40% over the past twelve months, but has still underperformed the overall market. In addition to being a good way to invest in the country’s BPO sector, it also holds majority market shares of wireless, fixed line and Internet communications, making it a major beneficiary of the rising adoption of smartphones across the country.
Philippine Long Distance Telephone (ADR) (NYSE:PHI)’s long-term fundamentals aren’t particularly impressive, and exhibit the classic conundrum that large telecom companies face – rising expenses, unstable cash flow and declining profits. Last year, the company was forced to give up an important 3G frequency to rival Globe Telecom, after regulators deemed that the company had become too big after its $170 million acquisition of rival Digital Telecommunications Philippines. To make matters worse, Philippine Long Distance Telephone (ADR) (NYSE:PHI)’s media subsidiary, TV5, continues to post quarterly losses as well. On the bright side, the stock still pays a decent 2.8% quarterly dividend.
A more conservative way to invest
For most investors looking to expose themselves to the Philippine market without the diversified approach of an ETF or the riskier road of investing in Philippine Long Distance Telephone (ADR) (NYSE:PHI), I suggest looking no further than coffee giant Starbucks Corporation (NASDAQ:SBUX).
Starbucks Corporation (NASDAQ:SBUX) is planning to open 100 new stores in the Philippines over the next four years to capitalize on the rapid growth of its middle class. There are currently over 200 stores in the country. Starbucks’ Philippine expansion is part of an aggressive retail expansion into Southeast Asia, which also includes opening 100 new stores in Indonesia over the next three years. Starbucks Corporation (NASDAQ:SBUX) currently operates 700 locations in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam.
Starbucks Corporation (NASDAQ:SBUX) has enjoyed massive success in the Philippines by positioning its stores near BPOs, where outsourced workers visit at all hours of the day. Director of operations Angela Cole also introduced widely publicized Coffee Master tournaments and seminars across the country to attract coffee lovers and to build the Starbucks Corporation (NASDAQ:SBUX)brand. That effort was so successful that the program was eventually brought back to North America and other international markets.
In 1997, the opening of the first Starbucks store in Makati City, Manila was met by long lines and set off a national trend in coffee houses. With CEO Howard Schultz’s big plans for Southeast Asia, Starbucks Corporation (NASDAQ:SBUX) looks to dominate that trend for the foreseeable future.
The Foolish Bottom Line
Investors should realize that the Philippines is a rapidly rising economy that deserves attention. In addition to the three options that I have presented in this article, there are also many major Philippine stocks available on the OTC markets.
Although the country’s growth is still throttled by complex labor laws, pervasive corruption, and geopolitical risk in the South China Sea, the country is slowly but surely getting its act together. I believe long-term investors should pay close attention to the rise of the Philippines and its neighbor, Indonesia, which are looking to form a new class of Asian Tigers for the 21st century.
Leo Sun owns shares of Starbucks. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks.
The article Three Ways to Invest in the Philippines originally appeared on Fool.com.
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