Fund managers turn their back on the Philippines

FUND MANAGERS have slashed their exposure to the Philippines by more than half in the past three years as the former emerging market darling dramatically fell out of favor.

In mid-2015, emerging market equity funds typically had a 2% weighting to the Manila exchange, an overweight position of about 0.7 percentage points vis-à-vis the benchmark MSCI index. However near constant selling since then has brought the average fund weight down to 0.87%, the lowest level since 2011 and below the Philippines’ benchmark weight, based on analysis of the holdings of 180 EM equity funds with combined assets of $355 billion conducted by Copley Fund Research.

The retreat has been broad based, with 83% of funds cutting their exposure to the Philippines over the past year, according to Steven Holden, founder of Copley.

Only 58% of funds now have any holdings at all in the Philippines, the lowest level since early 2012, with vehicles run by the likes of BlackRock, Fidelity, Ashmore, Carmignac and Pictet exiting the country in the past year.

Even the manager of one of the funds that still has an outsize exposure to Manila told the Financial Times: “To be honest, it’s not because I find the Philippines all that attractive right now. I am actively seeking substitutes.”

While stock-specific factors play a role in the exodus, fund managers cite concern over the macroeconomic backdrop in the Philippines, amid a perception that the central bank has fallen behind the curve in tightening monetary policy.

Economic growth has been a robust 6% or above since 2015. As a result, inflation has spiralled to a nine-year high of 5.7% and the current account, which has traditionally been in surplus to the tune of 3-4% of gross domestic product a year, slipped to a deficit of 0.8% of GDP in 2017.

Despite this, the central bank cut interest rates from 4% to 3% in 2016 and only returned them to the 4% level this month.

With rates still low by historical standards, the peso has fallen 6.7% against an ascendant dollar this year to a 12-year nominal low of P53.5 per dollar, adding to losses for foreign investors who have already had to grapple with a 10.8% year-to-date

slide in the Philippine Stock Exchange Composite index in local currency terms.

“There has been a decision over the last couple of years to let our weighting slide lower. We were quite overweight,” said Douglas Reed, global strategist and economist on the emerging and Asian equity team at Newton Investment Management, whose Emerging Income Fund has closed its 2.1% position in the Philippines in the past six months, according to Copley’s data, while its sister Global Emerging Markets Fund has cut its holdings by 2.7 percentage points.

“The Philippines is one of the fastest-growing EM economies but we had become a little more concerned that the economy was perhaps growing a little bit faster than it should be,” Mr. Reed said.

“The central bank has decided to take a lackadaisical approach to inflation targeting. It’s only this year that they have stood up and come out with rate increases, therefore we’re slightly more bearish on the currency over the next six months versus the average EM currency. We would like to see the central bank get ahead of the curve.”

Andrew Jones, portfolio manager and head of equity research at PineBridge Investments, whose Global Emerging Markets Focus Equity Fund has also cut its exposure, said: “Going into this [period], a lot of fund managers were pretty long the Philippines. It’s a secular growth opportunity, GDP [growth] is in the 6% range and is likely to stay there.”

He added: “But CPI [inflation] has been creeping up a lot. There is uncertainty on the trade side and the dollar. Most investors want to see a higher interest rate in the Philippines right now. The central bank is not as responsive as we would like.”

However Mr. Jones played down comparisons with Turkey, which has been plunged into a financial crisis as a result of its central bank failing to tighten policy enough to correct surging inflation and a widening current account deficit.

“In Turkey there is a lot more dollar debt. In the Philippines, growth is a lot more robust,” he said. “Turkey is at the other end of the spectrum. The Philippines is responsive, just not fast enough.”

Mr. Reed also cited concerns over the policies of Rodrigo Duterte, the Philippines’ strongman president, whose war on drugs has led to the deaths of an estimated 12,000 people since he took office in 2016 and who has also taken a tough line with Islamist militants on the southern island of Mindanao.

“His economic policies have been good and we have been impressed with those,” said Mr. Reed, “but it’s the unknown unknowns, it’s these kinds of things that can suddenly become a market focus”.

The Manila index also has more quotidian factors potentially weighing on it. It has no technology stocks, Mr. Holden noted, a potential handicap in an era when tech — about 27.2% of the MSCI Emerging Markets index — is all the rage.

It is also relatively expensive, trading at 19.1 times trailing earnings, versus 14.1 times for the MSCI benchmark.

Despite this, Mr. Jones believes investors are willing to pay up for exposure to strong economic growth that is not dependent on China.

“We like the fundamentals, we just want to get a little more comfort on the macro side before investing more,” he said. Others remain more upbeat still on the Philippines.”

Scott Klimo, chief investment officer of Washington state-based investment house Saturna Capital, said: “The demographics are probably the best in Asia, it certainly has the youngest population. The English spoken there tends to be pretty decent so you do see BPO [business process outsourcing] opportunities there and Filipinos are happy to go abroad and work and send back remittances.”

Saturna’s Amana Developing World Fund has a 7.8% position in the Philippines, the highest of the 180 funds in Copley’s database. Its thirdlargest holding is SM Prime Holdings, the country’s largest shopping mall and retail operator; it also has stakes in Aboitiz Power and Manila Electric (Meralco).

Mr. Klimo expects the latter duo to benefit from an ongoing need for greater electricity generation and distribution in the Philippines. Perhaps somewhat unexpectedly, he viewed SM Prime as a potential beneficiary of rising global temperatures, given its air-conditioned properties.

He is also relaxed about the Manila exchange’s relatively high valuations, at least by EM standards, arguing that Aboitiz, trading on 13 times forward earnings with a 4% dividend yield “doesn’t strike me as being expensive”, while Meralco’s 20 times ratio is cushioned by a near5% yield.

Mr. Klimo, though, accepted that SM Prime, on 32 times earnings was “really expensive”, although he argued that it was “a little more reasonable” from a net asset value perspective.

As for the economic issues, Mr. Klimo said they were pretty much the norm in developing economies, while some metrics were improving, such as government debt, which has steadily fallen from 43.9% of GDP in 2009 to 28.3% last year.

He also suggested that part of the depreciation of the peso had less to do with the economics than the fact that Mr. Duterte “is a disaster” and some people “don’t want to be associated with him”.

Noting that, as long-term, valuesbased investors (the fund is sharia compliant), it had built up its holdings under Benigno Aquino III, Mr. Duterte’s predecessor, Mr. Klimo said: “We have no illusions about the murderous thug who is the current president”. Harsh words indeed from the fund that is the country’s biggest fan.