FIM manager spots opportunity in Philippenes
Linda Blom, manager on Nordic manger FIM’s EM Small Cap fund recently visited the Philippines and has reported that factors are in place to support both short and long-term returns from related assets, which currently make up 7% of the portfolio.
“In the short term we see that uncertainty connected to the presidential elections have reduced compared to the situation six months ago, and that private consumption has remained stable and the concern about excess supply of office space looks to have passed,” Blom said in a note subsequent to her visit.
“After the presidential election we expect the market to focus on the new administration’s opportunities and ability to take on challenges in the infrastructure sector and increased direct investments. We are particularly interested in consumer and property sectors, which both benefit from the mainstream drivers of economic growth, ie, remittances to the country and a growing business process outsourcing (BPO) industry.”
Remittances from Filipinos living abroad account for some 10% of GDP, FIM’s figures suggest, contributing some $20bn annually to local GDP. Economic growth was 6.1% in 2014, 5.8% in 2015, and FIM estimates it will be 5%-6% in 2016. Besides remittances and BPO, tourism is the third leg supporting growth.
What this means is that because of the importance of remittances, the local economy is sensitive to the performance of other economies where Filipinos work. Some 44% of remittances come from the US, 23% the Middle East, and 16% Europe.
Blom said that discussions with local economists suggest that there is no firm evidence yet that remittances are being hit by a downturn in the Middle Eastern economy. However, should this come to pass, then expectations around BPO growth could offset any weaker remittance flows. BPO turnover went from $19bn in 2014 to $22bn in 2015, and is expected to hit $25bn in 2016 – the sector growth rate is around 20% annually with the number employed locally set to grow from 1.15 million to 1.3 million by the end of 2016.
Within BPO, Blom visited Swedish company Transcom, which employs several hundred people providing telecoms services. She said that this visit identified some key competitive benefits including the ability for Filipinos to speak english to customers without the accent that often is associated with competitors based in locations such as India.
A signifiant shift in investment patterns could take place starting later this year after the presidential elections in May, Blom notes. The current administration has been heavily focused on an anti-corruption drive, but this has resulted in less focus on investment projects.
It is widely expected that the next administration will focus more on so-called PPP projects, and diversify infrastructure spending away from the Metro Manilla region towards other parts of the country. Foreign direct investment remains low by Asean standards – at just 1.4% of GDP equivalent against 2%-4% for the broader region. Blom notes that this is seen as impacted by the country’s basic law, which has been seen to affect the willingness of foreign investors to place their money in the country. Again, the elections could result in an administration that is more willing to amend certain paragraphs in law, which could positively affect foreign investors.
Finally, Blom notes that valuations on the local stock market remain fair if corporate earnings expectations are included in the calculations. The current market price/earnings ratio of 16.7x is not cheap and the Philippenes does not look cheap against other emerging markets. However, including those earnings expectations and measured against historical figures, the valuations are reasonable, Blom concludes.
In 2014 the local index measuring the Manilla exchange rose some 20%, or more than 35% in euro terms. The index fell through the latter part of 2015, and so far this year it has failed to advance much – it is up 6% in local currency since the start of 2016.