Investing in the Philippines (EPHE, PHI)

Article by Investment U

Last week, a crack reporter for a leading investment newspaper asked me the following question:

“What’s the economic significance/implication of a country having a young population?”

I had to think quite a bit before responding. You often read about the connection between demography and investing. Gurus like Harry Dent focus almost exclusively on demographic trends to make their market calls.

In brief, here’s my take on how a youthful population can affect the potential for economic growth of a country. More importantly for investors, what companies will likely prosper with this demographic wind at their back?

• Younger people are just at the beginning of their consumer and investor life cycle – great fuel for upward growth of consumer spending in many areas over a long period of time.

• A younger population means lower healthcare and other government retirement benefits – greatly relieving pressure on national budgets.

• Younger people get married and have kids – this means a population growth spurt – a key part of the formula for economic growth and a sign of confidence in the future.

But I caution that having a youthful population is far from an automatic success formula. A country needs to have basic institutions in place, such as rule of law and an independent judiciary, good primary education and an open market economy.

Need proof? Many of the poorest countries in the world have a young population, but are mired in war, political instability and corruption. Mali, for example, has 47% of its population under the age of 14.

Growing Faster

It’s interesting though to see that younger countries do seem to be growing faster. I don’t want to bury you in numbers, but let me give you some data points.

While America has 20% of its population under the age of 14, the Philippines tops the list at 34.6%. For Peru, it’s 28.5%, Columbia 26.7%, India 27.3%, Mexico 28.2% and Vietnam 25.2%. For China, it’s a surprising low of 17.6%, and Russia comes in at only 15.2%.

On the other side of the equation, the percentage of citizens over the age of 65 is highest in Japan at 22.9%, while it’s 13% in America, 6.6% in Mexico, 6% in Indonesia, 5.5% in Vietnam and only 4.3% in the Philippines.

The Philippines looks like a clear winner on both ends of the age game.

But the critical question for investors is to think through what areas will benefit most from these demographic trends. A growing population and families at the beginning of their consumer life cycle means higher demand for things like food, drugs, consumer banking services like mortgages, cellphones, oil and energy, waste management, autos and motorcycles, construction and housing.

The Republic of the Philippines

As an example, let’s take a look at the winner of the demographic derby, the Republic of the Philippines. For some time, the Philippines, a country of 100 million, has been a bit of a laggard in Asia, though lately its prospects are brightening. The country is now a net creditor and its budget deficit has dropped to 2% of its GDP. Infrastructure is improving and the political situation seems to stabilizing, and the Philippines’ banking system is the healthiest in Southeast Asia.

All this good news has sparked Manila’s stock market. It was the world’s seventh-best performer in 2011 and, so far in 2012, the Philippines ETF (NYSE: EPHE) is up 25.9%.

You should be able to do better than this basket of stocks if you can pick the companies growing revenue and profits the fastest. Some may think that stock picking is an afterthought after identifying a promising trend or market, but it’s by far the most important decision.

For the Philippines, here’s the challenge: there’s only one Philippine stock trading on the NYSE – Philippine Long Distance (NYSE: PHI). And while it offers a nice dividend, the stock seems rather expensive to me and growth is slowing.

There are also 12 “pink-sheet blue-chip” Philippine stocks that trade over the counter, but the liquidity for them is very poor.

If you have a brokerage account that allows you to invest in the Philippine market though, here are a few companies I like in particular:

• San Miguel Corp, which is not only the dominant (founded in 1890) brewer in the Philippines and many parts of Asia, but is active in food, beverages, power, mining and banking. Drinking beer (before graduating to fine wine or a martini) seems a perfect fit with youthful population.

• Another good match is SM Investments Corp. Founded in 1960, the company is at the sweet spot of shopping mall development, retail, financial services, real estate development and tourism, hotels and conventions businesses in the Philippines. During the first quarter, revenue was up 16% and net income up 13% year over year. SM Investments is the top holding (8.2%) of EPHE.

For many of you, EPHE is the best fit, but don’t forget your trailing sell stop since there can always be some profit-taking from time to time.

Good Investing,

Carl Delfeld

Article by Investment U