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Philippine Long Distance Telephone (ADR) (PHI), Starbucks Corporation (SBUX): Three Ways to Invest in the Philippines

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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.

Philippine Long Distance Telephone (ADR) (NYSE:PHI)

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.

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