Where To Invest In Asia: Perhaps The Philippines? Part One

Introduction

In late February, I was contacted by Mr. Agutaya, a Philippine Certified Public Accountant. He asked via e-mail what I thought of investing in The Philippines. It reminded me that in Asia, most Western attention has focused on China, Hong Kong, India, and Singapore. So I suggested a two-part series. In the first, we look investment prospects in a number of Asian countries. In the second, we look more closely at Philippine investment opportunities.

Background

Geographic and other “size” data on Asia countries are presented in Table 1. It is not surprising to find that China and India are the largest, with the Philippines ranking fifth, just below Indonesia. The population density figures for China and India are somewhat misleading: even though raw data show India as almost three times as densely populated as China, the arable land of India (1.5 million sq. km.) is actually greater than that of China (1.2 million sq. km.).

Table 1. – Asian Countries: Population, Size, GDP

 Country Population(in mil.) Land area(sq. km) PopulationDensity GDP(mil. US$) GDP/PUS$
China 1,341 9,596,961 140 5,745,133 4,284
India 1,196 3,287,263 364 1,430,020 1,196
Indonesia 238 1,910,931 125 695,059 2,920
Philippines 94 300,000 313 189,061 2,011
Vietnam 87 331,212 264 101,987 1,169
Thailand 67 513,120 131 312,605 4,639
South Korea 49 99,828 491 986,256 20,128
Malaysia 28 330,803 85 218,950 7,820
Taiwan 23 36,188 645 426,984 18,303

Source: World Bank

China’s GDP is four times as large as India’s, even though their populations are about the same. Per capita incomes of South Korea and Taiwan are much greater than other Asian powers, with Malaysia a distant third.

Over the last two decades, most Asian countries have grown rapidly. Table 2 provides the annual average growth rates for both GDP and by sector for Asian countries. Growth was interrupted in 1997 by the Asian financial collapse, but great gains have been made since then.

Table 2. – Average Annual Growth Rate, 1990 – 2009

Country GDP Agriculture Industry Services Ratio
China 10.1% 4.2% 12.1% 10.2% 2.7
Vietnam 7.3% 3.8% 9.9% 7.4% 2.3
India 6.5% 2.8% 6.7% 8.0% 2.6
Malaysia 6.0% 1.7% 6.1% 7.6% 4.0
South Korea 5.6% 1.6% 6.1% 5.1% 3.6
Indonesia 5.0% 2.9% 5.4% 5.5% 1.9
Taiwan 4.9% -0.1% 3.6% 4.1% n.a.
Thailand 4.7% 1.8% 6.1% 4.2% 2.9
Philippines 3.6% 2.4% 3.0% 4.6% 1.6

Source: Asian Development Bank

In most developing countries, the industry and service sectors grow more rapidly than agriculture. The final column in Table 2 gives the ratio of the average growth rate in the industry and service sectors relative to agriculture. For most countries, the industry and service sectors grew by more than twice as fast as agriculture.

In the sixties, the Philippines was second only to Japan as the richest nation in Asia. However, the Marcos reign (1965-1986) brought in corruption and slower growth. In February 1986, the “bloodless revolution” (People Power Revolution) removed Marcos from power.

Recession Effects

The Western banking collapse caused a global panic and launched the global recession. In most Asian countries, the initial impact was seen in falling exports and stock market collapses. These, in turn, led to further domestic reductions in aggregate demand.

Table 3 shows how exports of Asian nations fell off in 2009. Inasmuch as exports had been the primary “engine of growth” for most of these countries over the last two decades, the collapse in global demand hit them hard.

Table 3 – Percent Fall in Exports,  Asian Nations, 2009

Country Percent
Vietnam -10.0%
Thailand -13.4%
Indonesia -13.9%
India -14.5%
China -15.7%
Philippines -17.4%
South Korea -17.8%
Malaysia -19.0%
Taiwan -20.0%

Source: IMF Balance of Payments Database

Table 4 provides data on global stock market losses following the Western bank collapse. In the ensuing panic, virtually all markets lost 50% or more. The losses are calculated from stock market highs (usually some point in late 2007 or early 2008 to the bottom during the recession).

Table 4. – Global Recession Stock Market Performance

 Index Index High Index Low %Loss
Asia
Malaysia  (FBMKLCI:IND) 1499 801 -47%
South Korea (KRX100:IND) 4,178 1934 -54%
Philippines (PCOMP:IND) 3,838 1,685 -56%
Taiwan (TWSE:IND) 7,067 2,544 -64%
Thailand (SET:IND) 916 383 -58%
Indonesia (JCI:IND) 2,838 1,089 -62%
India (Bombay 500 IDX) 8,910 2,961 -67%
China (Shanghai SE) 6,359 1,789 -72%
Vietnam (VNINDEX:IND) 1,171 240 -80%
Rest of World
Eurostoxx 50 PR 4,543 1,810 -60%
Nikkei 225 (Japan) 18,239 7,569 -59%
S&P 500 (US) 1,558 683 -56%
Brazil Bovespa 73,794 32,706 -56%

Source: Bloomberg

As I pointed out in an earlier article, global stock market losses totaled $36 trillion, and the resulting “wealth effect” cause a further reduction in aggregate demand.

Recovery

It is remarkable how rapidly Asian countries have recovered from the global recession. Table 5 provides this information, along with data for Europe, Japan and the United States. While Western nations continue to struggle with unemployment and debt, Asia is growing rapidly again.

Table 5. – GDP Growth Projections

Country 2008 2009 2010 est. 2011 proj. 2012 proj.
China 9.6% 9.1% 10.5% 9.6% 9.5%
India 6.4% 5.7% 9.7% 8.4% 8.0%
Vietnam 6.3% 5.3% 6.5% 6.8% 7.0%
Indonesia 6.0% 4.5% 6.0% 6.2% 6.5%
Malaysia 4.7% -1.7% 6.7% 5.3% 5.2%
Philippines 3.7% 1.1% 7.0% 5.0% 5.0%
South Korea 2.3% 0.2% 6.1% 4.5% 4.2%
Taiwan 0.7% -1.9% 9.3% 4.4% 4.7%
Thailand 2.5% -2.2% 7.5% 4.0% 4.3%
Japan -1.2% -5.2% 1.9% 2.0% 2.0%
United States 0.4% -2.4% 3.1% 2.6% 2.4%
European Union 0.9% -4.1% 1.0% 1.8% 2.2%

Source: International Monetary Fund, World Economic Outlook Database, April 2010

In the past, Asian countries depended on exports for growth. But now, growing middle classes are the primary engine for growth. In the Philippines, consumption is fueled by high level of remittances. These remittances account for about 5% of GDP[1].

Investing in Asia

For foreign investors, there are two key questions to be addressed before getting to specific investment choices:

  • How is the stock market likely to perform, and
  • What will happen to the currency?

Looking Forward: How Are Stock Markets Likely to Perform?

Table 6 shows how much stock markets have recovered from their pre-recession highs. The European, American, Japanese, and even Brazilian markets still have a way to go.

Table 6. – Stock Market Recoveries

Index Index High 3/28/2011 Index % Below High
Asia
Indonesia (JCI:IND) 2,838 3,592 27%
Thailand (SET:IND) 916 1,036 13%
South Korea (KRX100:IND) 4,178 4,438 6%
Philippines (PCOMP:IND) 3,838 3,907 2%
Malaysia  (FBMKLCI:IND) 1499 1,520 1%
Taiwan (TWSE:IND) 9,763 5,887 -17%
India (Bombay 500 IDX) 8,910 7,318 -18%
China (Shanghai SE) 6,359 3,097 -51%
Vietnam (VNINDEX:IND) 1,171 458 -61%
Rest of World
Eurostoxx 50 PR 4,543 2,911 -36%
Nikkei 225 (Japan) 18,239 9,459 -48%
S&P 500 (US) 1,558 1,319 -15%
Brazil Bovespa 73,794 67,675 -8%

Source: Yahoo Finance

In Asia, Indonesia and Thailand are way ahead of their pre-recession highs. The markets of The Philippines, South Korea, and Malaysia have fully recovered, while China and Vietnam are still way off their earlier highs.

One measure of whether a market is over-bought is its price to earnings ratio (P/E). To get an approximation of these, I have taken the P/Es of Exchange Traded Funds (ETFs) that broadly reflect each country’s stock market. The results are presented in Table 7.

Table 7. – Price Earnings Approximations

Region/Country ETF P/E
Asia
South Korea EWY 10
Philippines EPHE 11
China SXI 11
Thailand THD 12
Taiwan EWT 13
Indonesia IDX 14
Malaysia EWM 15
India INDY 17
Vietnam VNM n.a.
Rest of World
Brazil EWZ 10
Europe FEZ 11
US SPY 14
Japan EWJ 15

Source: Yahoo Finance

The P/Es for India, Indonesia, and Malaysia suggest proceeding with caution, while the P/Es of South Korea, The Philippines, and China appear quite reasonable.

Looking Forward: What Will Happen to Currency Values?

What happens to currency values is important because for overseas investors, capital gains or losses will be made on currency valuation changes. Consider the following concrete example. Suppose you invested $100 in Nikkei 225 on February 1, 2007 and liquidated it on February 1, 2011. As Table 8 illustrates, you would have lost 41% on the Nikkei 225. But because the Yen appreciated 46% against the US$, your net loss would only have been 14%. In short, when investing overseas, you can earn capital gains or losses on currency value changes as well as on stock market movements.

Table 8. – Capital Gains for Foreign Investor

  Equity Currency Investment
Date Nikkei 225 Yen/US$ US$ Yen
2/1/2007 17,519.50 120.71 100 12,071
2/1/2011 10,274.50 82.59 86 7,079
Gain/Loss -41% 46% -14% -41%

Source: Yahoo Finance, Oanda

Consider first what has been happening to exchange rates.  In the global panic resulting from the Western banking collapse, the dollar gained value as a “safe haven”. But as Table 9 shows, all Asian currencies gained value relative to the US$ since 2009. This is causing concern in most Asian countries inasmuch as the appreciation of their currencies makes their exports less competitive in the US. Since 2009, both the Indonesian and Malaysian currencies appreciated 16% against the US$.

Table 9. – Currency Rates per US$

  Currency/US$   2008   2009   2010   2011  2009-2011%Change
Indonesia 9,225 10,395 9,087 8,710 16%
Malaysia 3.3 3.6 3.3 3.0 16%
Korea 1,018 1,277 1,157 1,125 12%
Thailand 33.4 34.3 31.7 30.3 12%
Taiwan 31.1 33.0 31.6 29.6 10%
Philippines 43.3 47.6 45.1 43.4 9%
India 45.9 47.6 46.1 44.9 6%
China 7.0 6.8 6.8 6.6 4%
Vietnam 16,450 17,800 18,792 21,037 -18%

Source: Oanda

Will these currency appreciations continue, or will these currencies lose value moving forward? What causes currencies to lose value? The biggest danger is that economies will overheat, driving up domestic prices and increasing imports with a consequent drop in the local currency value. For these concerns, there are several key indicators worth examining:

  • GDP growth rates;
  • Government balances;
  • Government debt;
  • Current account balances, and
  • Inflation.

GDP Growth Rates – The projected GDP growth rates reported in Table 5 for Asian countries are impressively high. But they are not out of line with past performance. No concern here.

Government Balances – Data on projected government deficits are presented in Table 10. With the exception of India, it appears that all governments are moving from stimulus to a more neutral policy. The projected deficits of Malaysia, Vietnam, and India are troubling.

Table 10. – Government Deficits

 General Government  2008  2009  2010 est.  2011 pro.  2012 pro.
South Korea 1.7% 0.0% 1.4% 2.0% 2.3%
Indonesia 0.0% -1.6% -1.5% -1.7% -1.6%
Philippines -0.3% -3.4% -2.6% -2.4% 1.9%
Thailand 0.1% -3.2% -2.7% -2.3% -1.6%
China -0.4% -3.1% -3.1% -2.1% -1.5%
Taiwan -2.4% -5.8% -3.8% -2.5% -2.3%
Malaysia -3.2% -5.5% -4.6% -5.5% -5.2%
Vietnam -0.9% -8.9% -6.0% -4.2% -3.5%
India -7.9% -10.2% -9.8% -9.2% -8.4%

Source: IMF, “Fiscal Monitor” and World Economic Outlook Database

Government Debt – Problems in the Euro area are indicative of what can happen when government debt is excessive. Table 11 provides data on the debt of Asian governments. Government debts lower than 50% of GDP are quite manageable, particularly if the government is not running large surpluses. The debt coupled with the deficits of India and Vietnam are a cause for concern.

Table 11. – Gross Government Debt, 2010

Country % GDP
China 19.1%
Indonesia 26.7%
South Korea 32.1%
Taiwan 39.1%
Thailand 45.5%
Philippines 46.3%
Malaysia 55.1%
Vietnam 56.7%
India 75.1%

Source: IMF, International Financial Statistics

Current Account Balance – There is also the question of whether the countries’ current account balances are manageable. Large current account deficits are precursors of weaker currencies. Projections of the current accounts are presented in Table 12. The current account deficits of both India and Vietnam are notable.

Table 12. – Current Account Projections

Country 2008 2009 2010 est. 2011 proj. 2012 proj.
Malaysia 17.5% 16.5% 14.7% 13.8% 12.9%
Taiwan 6.8% 11.3% 10.0% 9.5% 9.1%
China 9.6% 6.0% 4.7% 5.1% 5.5%
Philippines 2.2% 5.3% 4.1% 3.4% 3.0%
Thailand 0.6% 7.7% 3.6% 2.5% 1.7%
South Korea -0.6% 5.1% 2.6% 2.9% 2.3%
Indonesia 0.0% 2.0% 0.9% 0.1% -0.5%
India -2.0% -2.9% -3.1% -3.1% -3.1%
Vietnam -11.9% -8.0% -8.3% -8.1% -7.8%

Source: IMF, “Fiscal Monitor” and World Economic Outlook Database

The Philippines is projected to run a trade deficit of 10.2% of GDP in 2010. However, its unusually high income remittances from workers abroad (4.8% of GDP) contributes significantly to its positive current account balance.

Inflation – Domestic inflation can also be a leading indicator of weaker currencies in the future. Table 13 provides historic and projected data on consumer prices. Once again, Vietnam and India are the most worrisome.

Table 13. – Consumer Price Increases, Asian Countries

 Country  2007  2008  2009  2010  2011 proj.  2012 proj.
Taiwan 1.8 3.5 -0.9 1.5 1.5 1.5
Malaysia 2.0 5.4 0.6 2.2 2.1 2.3
Thailand 2.2 5.5 -0.8 3.0 2.8 2.5
South Korea 2.5 4.7 2.8 3.1 3.4 3.0
China 4.8 5.9 -0.7 3.5 2.7 2.0
Philippines 2.8 9.3 3.2 4.5 4.0 4.0
Indonesia 6.0 9.8 4.8 5.1 5.5 5.4
Vietnam 8.3 23.1 6.7 8.4 8.0 6.1
India 6.4 8.3 10.9 13.2 6.7 4.7

Source: IMF: WEO Database

A View from the Private Sector

One indication of how Asian countries are viewed by foreign investors are sovereign bond spreads: how much more these countries have to pay for loans than the US. This information is presented in Table 14.

Table 14. – Sovereign Bond Interest Rate Spreads, March 2011

(basis points over US Treasuries)

Country/Region Spread
Developing Asia 191.6
South Korea 89.3
Malaysia 110.2
China 149.8
Philippines 168.4
Indonesia 204.2
Vietnam 327.6

Source: World Bank GEM Data

Conclusions

This review of Asian nations suggests that investments in China, The Philippines, and South Korea should do well in the next few years. These countries are projected to grow at acceptable rates in the next few years with little chance of currency losses. At the other extreme, India and Vietnam appear risky. Both countries are projected to run large government and current account deficits and already have large government liabilities. The stock market runups in both Indonesia and Thailand makes one wonder how much further they will go. The estimated P/Es of India, Indonesia, Malaysia and Taiwan are very high.

In the second part of this two part series, attention will be given to specific investment opportunities in The Philippines.


[1] http://www.imf.org/external/pubs/ft/scr/2011/cr1159.pdf, Projected external debt dynamics are stable, p. 32

The content above was saved on the old Morss Global Finance website, just in case anyone was looking for it (with the help of archive.org):
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