Will ‘The Punisher’ Penalize Philippine Stocks?

Philippine stocks
The outskirts of Makati, the financial center of the Philippines. Photo credit: Luke Baynes

In the early 1960s, the Philippines was an economic superstar. Thanks to the country’s resource riches, its per-capita gross domestic product exceeded that of China, South Korea, Indonesia and other Asian nations.
What followed, unfortunately, was decades of poor leadership and economic mismanagement which turned the country into the “Sick Man of Asia.”
But the pendulum has swung back. The Philippines made a tremendous comeback under outgoing President Benigno Aquino III. It became a “rising tiger,” in the words of the World Bank.

Aquino’s Successes and Failures

Since Aquino took office in 2010, the Philippines’ economic growth trailed only China in the region over the past five years. GDP growth averaged 6.3%.

Philippines GDP
Source: The Wall Street Journal

Inflation under Aquino was relatively low, too. And both debt and budget deficits were brought under control.
Foreign direct investment (FDI) into the Philippines surged. FDI is up four years in a row, with the number of projects rising by 118%.
Besides services, much of this investment went into critical infrastructure such as electricity. In 2015, the country accounted for 15% of the total electricity investments in the Asia Pacific region.
Aquino’s policies were particularly uplifting for the Philippines’ young. The gross income of 25- to 29-year-olds is nearly 20% higher than for the average Filipino.
Yet, many Filipinos were left behind economically. The percentage of Filipinos in poverty is 26.3%. That is the same level as when Aquino assumed the presidency. So to those people, nothing had changed and change was needed.
That led to the recent election of 71-year-old Rodrigo Duterte as president. Among his populist messages was a promise to redistribute some of the wealth generated to those less fortunate.

‘The Punisher’ as President

However, there is no way to sugarcoat this. Duterte is a nasty guy.
He was mayor of Davao City in the southern part of the country. Davao was a rough town. It was known as the “murder capital” of the Philippines. It was unsafe for the average citizen to live there.

Duterte Harry
Rodrigo Duterte, the presumptive 16th President-elect of the Philippines.

Duterte took care of that. He went after the criminal element with “death squads.” Human rights activists say that about 700 people were killed by these vigilantes. Duterte himself boasted that the figure is closer to 1,700.
Thus, he’s garnered the well-earned nicknames of “The Punisher” and “Duterte Harry” – the latter a reference to Clint Eastwood’s hard-nosed vigilante cop “Dirty Harry.”
Nevertheless, Duterte became the hero of the discontented and those left behind economically in the country.
The good news is that Duterte was rather business-friendly as mayor of Davao. During the presidential election campaign, he promised to ease foreign ownership restrictions on Philippine businesses in order to entice investments into the country. He wants “hard investments” into the country – i.e., long-term investors.
Duterte also promised more spending on agricultural production to lower food prices. Rice takes up about a quarter of the budget for poor households.

Uncertain Future for Philippine Stocks

Will Duterte turn out to be a pragmatic leader, at least toward the economy?
Obviously, it’s too early to tell. That leaves a fog of uncertainty over both the Philippine economy and the stock market.
Aquino will be a hard act to follow, stock market-wise. Under his administration, the country’s top 10 conglomerates more than doubled their sales to $44 billion. Their profits rose by half, to $4 billion.
The Philippine stock market – which can be tracked using the iShares MSCI Philippine ETF (NYSEArca: EPHE) – has held up rather well since the election of Duterte.
The EPHE fund includes many of the Philippine blue chips, such as Philippine Long Distance Telephone Co. (NYSE: PHI), Ayala Corp. (OTC: AYALY), SM Investments Corp. (OTC: SMIVY) and Universal Robina Corp. (OTC: UVRBY).
If I owned EPHE, I would hold it until Duterte’s economic policies become clearer. And if I did not own it, I would also take a wait-and-see approach.
Let’s see what “The Punisher” has in store for investors.

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