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PH markets, long popular with foreigners, turn rocky under Duterte

By Mia Lamar  and Rachel Rosenthal 

A volatile new Philippine president is testing the faith of investors.

The country’s tiny markets – its stock market is about two-thirds the size of those in Thailand and Indonesia – have long been a favorite of global fund managers thanks to low debt levels, a growing middle class and an economy that has expanded faster than even optimistic projections. A rally in emerging markets this year that sent investor cash coursing everywhere from Pakistan to Peru further fueled market gains. By late July, the main Philippine stock index had gained 33% in just six months.

But it has hit the skids in recent weeks, and 2016′s gain is down to just 11%. The Philippine peso has slid 3.6% against the US dollar this month, a large move by currency standards.

Traders work at the Philippine Stock Exchange trading floor in Makati City in this file photo.

Traders work at the Philippine Stock Exchange trading floor in Makati City in this file photo.

Analysts have blamed the rockier markets on the erratic behavior of Philippine President Rodrigo Duterte, who took office on June 30, and some investors do say Mr. Duterte’s methods – including a bloody war on crime and lashing out against US President Barack Obama with profanity this month – have become too unpredictable. But others insist they remain focused on the country’s solid economic stance.

That tension is clear in the country’s bond market, where yields on 10-year government bonds denominated in dollars – preferred by foreign investors to peso-denominated debt – have edged higher this month, a sign of unease, but remain not too far above the yields on similar US debt.

The yield for such Philippine bonds traded at roughly 2.4% this week, compared with about 1.6% for 10-year US Treasuries. Jittery foreigners aren’t likely to destabilize the market, as foreign investors hold just 13% of Philippine government bonds, compared with roughly 40% in Indonesia and 51% in Malaysia.

“Should yields be higher than the US? I’m not sure they should be,” said Jason Pidcock, head of Asian income strategy for UK based Jupiter Asset Management, noting that the Philippines isn’t burdened by the large debt loads and sluggish growth plaguing many developed economies. Mr. Pidcock’s fund had a 7.5% weighting in Philippine stocks at the end of August, according to fund materials, far more than the roughly 1% prescribed by major Asian stock benchmarks.

Others are less upbeat

“Changing political dynamics have got us to flip our view completely,” said Kieran Curtis, an emerging-market portfolio manager at Standard Life Investments in London, which has $360 billion under management. Over the past two months, he said, the fund has sold its peso-denominated bonds and bought credit-default swaps on Philippine government bonds.

“If you’re having rule-of-law issues, and people with the money [to invest] are feeling threatened or antagonized, the investment is quite likely to slow down a bit,” he added, referring to Mr. Duterte’s tense relationships with a small group of powerful families that invest heavily in public-private partnerships.

Foreign investment in the Philippines’ stock and bond markets slumped 60% in August from July, to a net $427 million, according to the country’s central bank. It blamed the decline on investors’ “hesitancy to invest during ‘ghost month,’” a period in some Asian cultures where spirits and ghosts are believed to return to earth.

In an interview with The Wall Street Journal this week, the country’s finance secretary, Carlos Dominguez III, urged investors to look beyond Mr. Duterte’s bombastic remarks and focus on the government’s plans for tax cuts and infrastructure spending.

“We’re in a good moment economically,” Mr. Dominguez said. “But of course, every bit counts; we would much rather [foreign investors] stick around.”

Concerns around Mr. Duterte highlight the political risks that often come with investing in emerging markets, which have surged in popularity this year with ordinary investors. The rush into emerging-market funds has cooled in recent weeks, though cash is still rolling in, according to fund tracker EPFR Global. As of last week, emerging-market stock funds had drawn a net $2.4 billion in September, down from a record $6.3 billion in July.

As of the end of the day Thursday, investors had to pay $170,000 a year to insure against the default of $10 million of Philippine government bonds for 10 years, according to Thomson Reuters. It cost $138,000 on Sept. 8, a recent low.

“It’s pretty clear investors are unnerved,” said Khoon Goh, Singapore-based head of Asia research at Australia & New Zealand Banking Group Ltd. Still, Mr. Goh and others see bright prospects for this country of 100 million people. Mr. Goh recently raised his forecast for economic growth this year to 6.4% from 6.1%, and he expects the peso to strengthen by year-end.

Other investors who have sat on the sidelines as valuations grew increasingly stretched in the Philippines say they are now watching the selling with interest.

“We haven’t held anything in the Philippines for a while. We like to, if we can, buy markets that are out of favor,” said Gary Greenberg, head of global emerging markets at Hermes Investment Management in London. “Looks like the Philippines is coming our way.”