The Daily Update - Looking for value in the Philippines

Those in America looking to see the possibilities of electing a hold-no-punches president need only to look to Philippine’s President Rodrigo Duterte of late, who since taking office little more than 100 days ago has helped cause the deaths of around 3,600 suspected drug dealers and users. His flaunting of judicial process - accusing and hurting innocents (and even long deceased) as well as lawbreakers – is complemented by his ornery diplomacy. He has called President Obama and the Pope both ‘son[s] of a whore’ (Obama should he interfere with domestic policy and the Pope simply for causing traffic in Manila). Other amusing expletives include calling Singapore, ‘A garrison pretending to be a country’. 

But in such hard times, hard talk and hard actions have given President Duterte an approval rating above 75% (though the recently killed and captive were not included in the polls). Characteristic to his brazenness he is now looking to impose a nationwide ban of smoking in public places in a country where more than 17 million, or 28%, of adults smoke (which is more people than voted for his presidency).

But beyond the realm of inhalable and digestible toxins and those caught up in crosswinds, just how toxic is this administration for the country’s economic growth and for investment opportunities? GDP growth is still booming above 6.4% yoy (7% according to the latest quarterly estimate) and the World Bank forecasts 2017 and 2018 growth remaining above 6.2%. The country has retained its Baa2/BBB- rating according to Moody’s and Standard and Poor’s since 2014. Moreover according to Stratton Street’s Net Foreign Asset Analysis the Philippines is a 3* country meaning it still only has modest net foreign debts across the combined public, private and household sectors.

Since becoming investment grade in 2013 the Philippines has been in our investable universe though never in our portfolios. For since 2013, and well before, the Philippines has consistently failed to offer relative value according to our models and research. Remaining only 2 notches from junk their 10 year government bonds still only offer a spread of 81 basis points over US Treasuries (a gross redemption yield of 2.6%). Such bonds would lower both the average rating and expected return when it is possible to construct an A3 rated portfolio with a yield in excess of 3.5%. Our investment philosophy has consistently been to look for value in risk adjusted returns. Irrespective of Duterte’s unbridled policies, government and corporate bonds from the Philippines continue to underwhelm versus our models and other investment opportunities.

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