EPHE: Staying Sidelined On The Philippines

seekingalpha06-05

Philippine large caps have been in decline for over a decade now.Fundamentals offer little evidence of a change in fortunes.Pending a meaningful shift in the investment case, I’d remain sidelined. ...

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After a big rally in Q1, the fund has suffered a steep decline in reaction to a hawkish repricing in interest rate expectations. As things stand, EPHE is now down in the high-single-digits % to date. The big issue with buying this dip, though, is that domestic rates look increasingly likely to stay ‘higher for longer’ in light of rice inflation pressures and a hefty minimum wage hike. The central bank’s recent commentary also emphasized the need to guard against further currency weakness, so a Philippine pivot seems unlikely anytime soon. Data by YChartsThis setup isn't ideal for EPHE’s portfolio of rate-sensitive Real Estate and Industrials holdings, many of which have re-rated quite strongly on interest rate cut hopes. Even if its bank holdings do see an additional quarter or two of margin benefit from higher interest rates, the relatively low Financials/non-Financials split means it won't be enough to offset headwinds for the rest of the portfolio. Nor is EPHE priced especially cheaply on earnings or relative to its underlying book (~30% premium) here. Net-net, I don’t see a particularly compelling case to be long Philippine equities. JPMorganEPHE Overview – The Largest and Most Liquid Philippine Tracker Fundamentally, the iShares MSCI Philippines ETF hasn’t changed too much in recent quarters. It still tracks the dollar-denominated MSCI Philippines IMI 25/50 Index, which imposes concentration limits on a basket of Philippine large caps. The asset base is slightly larger but still relatively small at ~$108m, so liquidity (~19bps bid/ask spread) and execution aren’t great by iShares standards. That said, the ~0.6% expense ratio is competitive, particularly considering the lack of US-listed alternatives for single-country exposure to the Philippines. iSharesEPHE Portfolio – Skewed toward the Philippines’ Blue-Chip Conglomerates The ETF has further narrowed its portfolio to 33 holdings in recent quarters, which means % allocations are higher than before. By sector, Industrials, where diversified Philippine conglomerates are classified, remains the largest exposure at 30.5%. Interest rate-sensitive sectors like Financials (19.8%) and Real Estate (15.3%) are the other major allocations. The rest of the top five list comprises Utilities (9.8%) and Consumer Discretionary (8.1%) - both outperformers in recent years. From a sector standpoint, there are two things worth noting here. Firstly, that the diversified nature of EPHE’s conglomerate holdings makes its actual sector profile better balanced than headline numbers would suggest. Secondly, while the fund is relatively defensive, this cycle has seen its equity beta increase quite a bit to 0.8 (vs. the S&P 500 (SPY) - a nod to the current portfolio’s rate sensitivity. iSharesFollowing the addition of International Container Terminal Services (OTCPK:ICTEF), the largest piece in billionaire Enrique Razon’s business empire, to EPHE, investors now have exposure to the Philippines’ most prominent business families. Recall that the fund has historically retained exposure to local tycoon Henry Sy’s property development company, SM Prime (SPHZF) (8.3%), and holding company SM Investments (OTCPK:SVTMF) (6.0%). Another staple is EPHE’s exposure to Zobel de Ayala’s group of businesses via Ayala Land (OTCPK:AYAAF) (5.1%) and Ayala Corp (4.2%). Including BDO Unibank (OTCPK:BDOUY), the top five contribute 39.7%, though the overlap between conglomerates and their subsidiaries (e.g., SM Investments owns a near 50% stake in SM Prime and Ayala Corp owns ~51% of Ayala Land) means the actual single-stock concentration is higher than it appears. iSharesEPHE Performance – A Serial Underperformer Through the Cycles Over the last decade, EPHE, along with the rest of the Southeast Asian large-cap universe, has destroyed more shareholder value than it has created. For context, the ETF has five- and ten-year annualized returns of -4.5% and -2.2%, respectively. Even post-COVID, when many equity markets enjoyed strong rebounds, EPHE has remained in the red (-2.2% three-year annualized return). iSharesDespite the presence of cash-generating conglomerates and banks within its portfolio, EPHE doesn’t yield all that much either. The semi-annual distribution yield stands at ~2% on a trailing twelve-month basis (~1.2% 30-day SEC yield) – well below Southeast Asia’s highest-yielder, iShares MSCI Singapore ETF (EWS) at ~6%. At the heart of the issue is that Philippine large caps tend to be family-controlled conglomerates that don’t prioritize minority shareholder returns. Barring a meaningful shift in governance, I don't expect EPHE will screen highly for income anytime soon. MorningstarPerhaps the biggest issue for EPHE, though, is that even after years of drawdowns, it isn’t priced particularly cheaply relative to its fundamentals. The fund currently trades at ~11x earnings and 1.3x book; by comparison, earnings growth is running at a 10-11% pace through 2024/2025. Without a more appealing fundamental case for foreigners to return to the Philippines market, expect technical headwinds from declining investor participation and reduced benchmark weightings to further weigh on performance. JPMorganStaying Sidelined on the Philippines  Having started the year off strongly, EPHE has quickly given up its gains, and perhaps rightfully so, given where the fundamentals are trending. In the near term, all eyes will be on seasonal inflation and its impact on monetary policy, given the rate sensitivity of EPHE’s portfolio. And beyond that, the ability of Philippine large-caps to grow earnings fast enough to both justify their multiples and outpace currency depreciation will be key. For now, though, I don’t see a compelling fundamental or technical case to own EPHE and will be remaining on the sidelines.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2441225099"}