Of all the investible countries in the Asia Pacific region, the Philippines has arguably the most promising macroeconomic story. GDP per capita is low at roughly $2,900 USD per person1 (that’s less than half of Thailand’s). But not only is it the fastest growing Asian economy – sustainably at more than 6 percent annually – the country’s demographic profile is such that I believe its businesses, particularly in consumer sectors, will see sustained growth over the long term.
THE DEMOGRAPHIC DIVIDEND
Occupying a land area the size of Italy, the Philippines’ 7,641 islands boast considerable natural resources and biodiversity, but the country’s real economic engine is its people. In a population of roughly 100 million, more than half are under 30 (see chart). Life expectancy is increasing, and the birth rate – while slowing – remains high, so that over the next 30 years the Philippine population is thus expected to soar to 150m. The bigger picture painted by data on the country’s demographic profile and economy is its journey towards developed-market norms. That means smaller families with fewer dependents and higher discretionary spending. Indeed, the young Philippine middle class is already growing rapidly. Annual disposable incomes are up 14 percent annualised over the last three years, and the portion of the workforce earning more than US$5,000 has surged from 6percent in 2005 to 21 percent in 20132. I expect these trends to continue as the country’s economy continues to move up the value chain.
Debt in the Philippines is currently low, at a government, a corporate and a personal level, with consumer debt equivalent to only 8percent of GDP – among the lowest in the world. This level of indebtedness bring multiple benefits: the potential for growth both in consumer banking penetration and increased bank lending at a corporate level provides a huge opportunity for domestic economic boosts. At a government level too, with little existing burden, no major imbalances and no problem with inflation or deficits, the government can also finance investment through borrowing if it chooses. The country runs a current account surplus, and this is boosted by monthly remittances from overseas Everything seem to stack up in its favour.
Widespread usage of the English language mean foreign direct investment in services is quite easy to attract and back office investment into Philippines has been good. Job creation is increasingly happening in urban areas, although tourism is also a significant industry and is growing rapidly on the back of Chinese tourist growth.
BENEFITS OF A FLEXIBLE WORKFORCE
Meanwhile having a young population means there are plenty of workers to fill job vacancies. This should keep wage inflation in check, as does the fact that around 10 percent of the population lives outside the country. These overseas workers earn money in a variety of fields and most remit a considerable portion of their wages back to their families, usually before returning to spend the latter part of their working lives at home. What this means is that if the economy grows faster, there should be a pool of labour to tap into, and fewer people leaving the Philippines in search of paid work.
As with any country, there are bottlenecks for economic growth and these are mostly infrastructure-related. The country would benefit from more roads, rail links, and so on. But the incoming president, Rodrigo Duterte, has promised to increase spending on infrastructure from 3.3 percent of GDP to 5 percent of GDP.
Politics are always a risk in emerging markets. On balance, the political situation in the Philippines looks favourable and it seems likely that politics will be a positive factor. President Duterte talks freely – occasionally too freely – but I think he will be good for the economy and therefore the stock market. He wants to cut down corruption, has some slightly unorthodox ways of going about that, but the objective is a good one – there’s an upbeat feel in the country, generally Filipinos are optimistic. And the fact that he won his election clearly is a good thing – there was also no dispute with the result, which is good.
What all of this adds up to for me is an environment in which economic growth, and particularly growth in domestic consumption, will be strong. The Philippines is playing catch up with other countries and I think that will continue for some time. In economic terms, it will likely outstrip Thailand in GDP per capita within the next 15-20 years – I see very little reason why it shouldn’t.
HOW DOES THE PHILIPPINES FIT INTO THE PORTFOLIO?
The macro attractions of the Philippines are hard to deny. But as an equity investor the fundamental question is whether there are attractive, well managed companies for me to invest in. The answer is that while this maturing market doesn’t have the depth of some of its more developed peers, I see a number that do fulfill my investment criteria, and I own three businesses that I feel are a proxy for domestic consumption, and which, taken together give exposure to many different areas of the economy. One is a diversified conglomerate, one is property-based, focused on shopping malls (which gives exposure to general consumption since its tenants will be drawn from different sectors – food and beverage, fashion, and other forms of domestic consumption). And finally I own a large and successful snack producer selling into the Philippines and neighbouring countries.
As one might expect, yields are lower than in other markets and these are stocks, which I own for the growth potential rather than the dividends. While I believe that ultimately dividend growth for these businesses will be strong, within the portfolio, not every holding must have higher than average dividend yield. There are very good reasons to include a select few lower yielding stocks to help capture higher total returns. What the Philippines offers is exposure to what I consider to be one of the best and fastest growing emerging markets. It also helps balance the portfolio away from just the very high yielding businesses in very developed Asian markets.