China SOEs Bid On Philippines Clark International Airport Development

Four of the seven bidders on the design and development contract for the Clark Airforce base in the Philippines are Chinese State Owned Enterprises, according to the Philippines Bases Conversion and Development Authority (BCDA).  The China State Construction Engineering Corp Ltd, China Harbour Engineering Co Ltd and Sinohydro Corp Ltd have all submitted tenders.

Clark International Airport is north of Manila and previously served as an American Airforce base until the facility was closed in 1991. The Airport serves the Clark Freeport Zone, an important tax and duty incentivized area that aims to encourage investment in airport-driven urban facilities, targeting high-end IT, aviation and logistics related enterprises, tourism and other sectors. The area is connected to Manila by the Subic-Clark-Tarlac Expressway, which is in turn connected to the North Luzon Expressway, some 43km from Manila.

Chinese SOEs have been prominent in bidding on development contracts aligned with China’s Belt & Road Initiative, and has special encouragement to do so with the Philippines and ASEAN nations as China has both a Free Trade Agreement with ASEAN and a Double Tax Treaty with the Philippines, providing tax savings on the provision of certain products, services and manpower.

“It will be interesting to note, should a Chinese bid win, whether this will include Chinese labor” says Chris Devonshire-Ellis of Dezan Shira & Associates. “It is important that Philippines labor is deployed in development contracts in the Philippines”.

The contract is worth about US$250 million, meaning that opportunities will arise for subcontractors and materials suppliers familiar with airport and related constructions. The plan is to finish the Clark International Airport New Terminal Building by 2020, increasing Clark’s annual capacity from four million to twelve million passengers. This will give airlines an alternative to Ninoy Aquino International Airport (NAIA), which at the moment is the main international gateway to the Philippines, but suffers from congestion problems.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

 

These Philippine Stocks Have Been Humming Since the Friendly Exchange Between Trump and Duterte

It was in October 2016 on a visit to Beijing that Philippine President Rodrigo Duterte  announced his country’s pivot away from the US and towards China. This created ripples across the geopolitical fabric in the region spreading all the way to Uncle Sam’s doorstep.

Philippine stocks were negatively affected, and the 70-year friendship between the two countries seemed to be heading for severe weather.

However, as the graph below shows, after declining until the penultimate week of 2016, the two main indices of the Philippine Stock Exchange (PSE) recovered and have had a good 2017 so far.

Net inflows to the sole ETF dedicatedly investing in Philippine stocks and traded on US exchanges – the iShares MSCI Philippines ETF (EPHE) – show a similar trend.

From the last week of October 2016 until November 2017, the $177 million ETF has seen net outflows of nearly $36 million according to Bloomberg data, owing primarily to the sharp outflows witnessed last year after Duterte’s comments. In YTD 2017, the fund has seen net inflows worth $12.2 million.

Will the friendly tone keep foreign money flowing?

The EPHE has returned 13.8% in this year so far, primarily due to financials (Ayala Corporation (AYALY), BDO Unibank (BDOUY)), real estate (Ayala Land (AYAAF), SM Prime Holdings (SPHXF)), and industrials (SM Investments Corporation (SMIVY)) sectors.

As far as the domestic markets are concerned, overseas investors have continued to buy Philippines stocks even after the announcement of a pivot away from the US as shown in the graph below.

Recently, during a visit to the island nation, US President Donald Trump termed the relationship between him and President Duterte as “great” while his counterpart sang a popular Filipino song.

Though amidst the camaraderie, broader Philippines stock indices did not hum the same tune, there were specific stocks which did quite well.

While the PSEi is comprised of 30 stocks, the broader PSE All Share Index is made up of 274 stocks.

At the end of trade on November 13 (the day that Trump and Duterte intially met), only three stocks forming the PSEi were in the black:

  • LT Group Inc
  • Manila Electric Company (MAEOY); and
  • Jollibee Foods Corporation (JBFCY)

These stocks remained in the top three in terms of returns between November 10 and 14, though LT Group and MAEOY exchanged positions. These stocks had gained 3.8% and 8.4% respectively in the two trading sessions. Meanwhile, Alliance Global Group, Inc. (ALGGY) and Bank of the Philippine Islands (BPHLF) also joined the group of rising stocks.

Meanwhile, on the broader PSE All Share Index, the following stocks have been the top gainers from the end of trading on November 10 until November 14 with the percentage change in their prices given in parentheses:

  • NOW Corporation – Information Technology (12.8%)
  • Manila Electric Company (MAEOY) – Utilities (8.4%)
  • Oriental Petroleum and Minerals Corporation (OPTBF) – Energy (7.7%)
  • Boulevard Holdings – Consumer Discretionary (7.5%)
  • Philippine Realty & Holdings Corp – Real Estate (7.2%)

The reason that these stocks have failed to boost the broad indices even after strong returns is that except for Jollibee Foods in the PSEi and Manila Electric in the All Share Index, the other gainers form a negligibly small portion of their respective indices, thus significantly reducing their impact on the broader stock market.

Given the fact that overseas investors have steadily increased their holdings of Philippine stocks even when relations with the US had become tense, the friendly tune being hummed by the two nations now could have a positive impact on equities of the island country.

Overlooking Widespread Human Rights Abuses In ASEAN Could Trigger Destabilization

Less than a month after the Association of Southeast Asian Nations (ASEAN) celebrated its 50th anniversary in Manila, Philippines, the UN Security Council called on the government of Myanmar to end its military campaign against the minority Rohingya Muslims. If the region continues to overlook widespread human rights abuses, political stability and economic growth will be at risk.

Each year, tourists descend on the many resorts, shops and convenience stores that have come to form the backbone of the beach town of Bangsaen, Thailand. In 1967, however, Bangsaen was an isolated, little-known village on the brink of becoming a landmark of Asian diplomacy. It was here that five foreign ministers from Indonesia, Malaysia, the Philippines, Singapore and Thailand negotiated and signed the Bangkok Declaration for the foundation of ASEAN, with the purpose of ensuring the stability of the entire Southeast Asian region.

Fifty years later, the organisation has ten members, and ten additional dialogue members that include India and China. Asian economic growth consistently leads global figures, and its populations and enterprises are projected to continue to prosper for decades to come. On its silver jubilee, ASEAN remains firmly dedicated to boosting security in the region, with ongoing tensions over the South China Sea and immediate nuclear threats from North Korea forming the pillars of member discussions. Even so, the organisation has thus far failed to address pervasive human rights violations committed by member countries, with critics warning of rising authoritarianism in the region.

Increasing rights violations

In Myanmar, this month has seen longstanding ethnic tensions erupt into bloodshed after minority Muslim Rohingya fighters attacked police posts and prompted a military crackdown that has seen over 370,000 Rohingya flee their homes. The Rohingya face widespread discrimination and violence at the hands of a Buddhist majority, though the group had received chronically little press attention before recent weeks. Adding to their isolation, the government has repeatedly refused to permit UN investigators entry to the country. Even so, the Rohingya have been labelled the most persecuted minority in the world, at risk of genocide, with the community fleeing in the thousands to Myanmar’s neighbours- especially Bangladesh, Malaysia, Indonesia and Thailand. Despite this, host countries typically refuse to grant Rohingya refugees any legal status; in the weeks before the current escalation, India was in talks with Myanmar and Bangladesh to deport 40,000 Rohingya Muslims.

In the same vein, the Philippine President Rodrigo Duterte has refused to discuss the topic of human rights abuses with the US Secretary of State and, given the US-Philippine partnership targeting a military insurgency in the Philippines’ southern island, social justice advocates would be foolish to hold their breath. This despite the fact that since Duterte’s so-called war on drugs began last year, widespread violence has resulted in the deaths of some 5,000 to 8,000 people. Duterte has also blocked the UN from conducting an independent investigation into the violence, thus far labelling his critics “crazies” and insisting that he shouldn’t be trivialised by upholding human rights standards. With sustained approval ratings, his campaign to reintroduce the death penalty may indeed be successful; the violence continues unchecked.

In Vietnam, authorities have broadened a crackdown on dissidents in recent years. In July this year, prominent human rights defender and activist blogger Tran Thi Nga was sentenced to nine years in prison on charges of conducting propaganda against the state in accordance with the controversial Article 88 of the penal code. The law has proven an effective tool of the government in silencing activists, along with reports of government sanctioned harassment and intimidation techniques.

ASEAN values versus national actions

Authoritarianism in the region runs counter to the otherwise liberal economic goals of Asia’s rising tigers: Vietnam has embarked on a decade-long campaign of labour and market reforms in a bid to attract foreign capital, with FDI flows rising as much as 6 percent in the first half of 2017 to $6.15 billion. At the same time, the Philippines’ Duterte is embarking on an ambitious goal of infrastructure spending at 7 percent of GDP, valued at $160 billion, by 2020. Bordering Bangladesh, China, India, Laos and Thailand, Myanmar represents a mammoth of untapped economic potential, but FDI flows will remain volatile as long as the bloodshed continues.

In most cases, human rights abuses are tied to failings in judicial independence, indicative of state support of illegal activities and poor protection for firms who seek to conduct transparent operations. Moreover, repression of the media and journalists frequently goes hand in hand with unsustainable, unbalanced economic development, such as a dependence on raw materials and energy resource revenues.

Poor governance throughout the Asian region, combined with skyrocketing economic growth and a burgeoning middle-class, sets the stage for political and social discontent to emerge in the near term. As the ASEAN community has become more integrated over the past fifty years, there has been increased pressure to implement the organisation’s vision of a “people-centred” community of nations. The finalisation of the ASEAN Charter at the end of 2008 sparked debate about utilising grassroots participation and bolstering civil society groups- in response, the group articulated the ASEAN Vision 2015, setting lofty goals for the widespread protection of human rights in a just, democratic environment. The stark reality of 2017 shows a clear trend in the opposite direction, and a disturbing reticence on the part of ASEAN’s leadership.

 

Article as appears on Global Risk Insights: http://globalriskinsights.com/2017/09/seeking-stability-human-rights-failures-asean/

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

How To Set Up In The Philippines

Under the Foreign Investment Act, 1991, which was amended in 2015, a vast majority of industries in the Philippines are completely open to overseas investment, allowing 100 percent foreign ownership in most cases. The country managed to attract over US$ 7 billion of FDI in 2016, 25 percent more than the previous year. The UNCTAD World Investment Prospects survey positions the Philippines as the 11th most promising host country for investment over the period 2016-18. In order to best leverage the advantageous conditions, such as widely spoken English and access to the ASEAN Economic Community, the most effective market entry model must be chosen by entrants.

Entry Models

There are a range of entry modes to choose from when investing in the Philippines. Each one is governed by different rules and, as such, each is suitable for different functions and business models. Below, the four main methods of entry are outlined.

Corporations

Companies can enter the Philippines by establishing as a corporation. This means registering a new legal entity with the Securities and Exchange Commission (SEC) in the Philippines. The structure of a corporation is such that the individual assets of the owners are legally separate from those of the company. Corporations come in two forms:

Filipino corporation – minimum of 60 percent Filipino equity ownership;
Foreign-owned domestic corporation – greater than 40 percent foreign equity ownership
The distinction between the two alternatives is important when it comes to land ownership and tax-incentive programs. Corporations can operate all functions of a business, and are typically profit-oriented enterprises. According to the World Bank’s Doing Business guide, setting up a corporation is a complex and long-winded process taking at least 28 days, four days longer than the Asia Pacific average.

Foreign-owned domestic corporations serving the Filipino market require a minimum of five shareholders and at least US$200,000 of paid in capital. The paid in capital can be reduced to US$100,000 if the corporation is involved in advanced technology or employs 50 direct employees. If the corporation is an ‘export market enterprise’ – defined as exporting at least 60 percent of its goods or services – the required capital is reduced significantly to P5000 (US$ 100).

Foreign-owned domestic corporations face the same tax conditions as local corporations: 30 percent corporate income tax and 12 percent VAT on local sales. Foreign corporations can register for numerous tax incentive with the Philippine Economic Zone Authority.

Branch Office

A branch office is a profit-oriented subsidiary of a foreign enterprise that engages in the activities of its parent company in the Philippines. This is the typical structure for business process outsourcing, such as call centers or back offices for multinational firms, which located in the Philippines due to low local wages as well as the large number of fluent English speakers. The establishment of a branch office typically takes three to four weeks from the time of filing with the SEC.

Similar to corporations, the capital requirements are US$200,000 for domestic market serving enterprises and P5000 (US$ 100) for export-oriented companies. The taxation of branch offices is also similar, with 30 percent corporate income tax and 12 percent VAT on local sales. However, branch offices also have to pay a 15 percent profit remittance tax on repatriation of profits to the parent company.

Representative Office

A representative office differs from a branch office in that it is not legally allowed to derive income. The key function of a representative office is to act as a liaison between the parent company and clients or partners in the Philippines. The minimum paid in capital for a representative office is a US$30,000 remittance from the parent company, which must be used for operational expenses. The average set up time for a representative office is similar to a branch office, three to four weeks from the date of application.

Regional HQ

There are two distinct types of regional headquarters: Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ). The graphic below shows what operations are legally allowed for both RHQs and ROHQs.

Regional or Area Headquarters (RHQ) are non-income generating offices of a foreign corporation. RAHQs are not allowed to participate in any management, marketing, or sales activities on behalf of branch offices in the Philippines or the mother company. Similar to representative offices, the main purpose of RHQs is to be a coordination and communication hub for subsidiaries, affiliates, and branches in the Asia Pacific region. The minimum paid in capital is US$50,000, to be used for the running of the office. Managerial and technical expatriate staff members will be taxed at 15 percent of gross compensation, rather than using the tiered income tax system.

On the other hand, a Regional Operating Headquarters (ROHQ) is an office of a multinational typically used for back-office functions. ROHQs are allowed to derive income only from affiliates of the parent company. ROHQs are afforded a special corporate income tax rate of 10 percent on taxable net income, as opposed to 30 percent for corporations and branch offices. In addition, 12 percent VAT is payable on local sales and 15 percent profit remittance tax on repatriation of profit. Similar to RAHQs, a 15 percent final withholding tax on the income of managerial and technical employees is payable rather than the standard income tax system. The minimum paid in capital for ROHQs is US$200,000.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Beware of Concentration Risk With The Philippines ETF, These Are The Stocks You’re Actually Buying

ETFs With Philippines Exposure

The two ETFs that currently provide the best exposure to Philippines equities are the iShares MSCI Philippines (EPHE) and the Global X South East Asia ETF (ASEA). The EPHE ETF invests solely in Philippines equities and thus provides better exposure to the country. In contrast, the ASEA ETF invests 6.5% of its portfolio in The Philippines.

The iShares MSCI Philippines ETF has an average trading volume of $6.23 million, making it fairly liquid and a dividend yield of 0.6%. The iShares MSCI Philippines ETF (EPHE) provides the most concentrated exposure to Philippines and aims to provide investment results that match the price and yield performance of the MSCI Philippines Investable Market Index. It is a market cap-weighted fund comprised of 44 companies, with the top ten holdings accounting for 63% of the total assets. The expense ratio is low at 0.64%. EPHE has a market capitalisation of $20.7 billion and AUM of $186 million.

Investors seeking more diversified exposure to South East Asian equities with the Philippines mixed-in can also consider the ASEA ETF. The ASEA ETF has an AUM of $13.8 million and expense ratio of 0.65%. The ASEA ETF has a trading volume of $23.8 million, making it illiquid in comparison to the EPHE ETF.

So far in 2017, the EPHE ETF has gained 12.9%, underperforming the emerging markets represented by the iShares MSCI Emerging Markets ETF (EEM). In the same period, EEM has gained 25.1%. Comparatively, the ASEA ETF has gained 20.4%.

In the EPHE ETF, the financials sector has the largest weight. Real Estate and financials make up 43.7% of EPHE ETF. Utilities, consumer cyclicals and consumer non-cyclicals constitute 14.1%, 13.6% and 12.9% respectively of the EPHE portfolio.

The EPHE is a market-cap weighted ETF with 43% of its portfolio invested in the financials sector.  Its top five holdings are Ayala Land (ALI.PM), SM Prime Holdings (SPHXF), BDO Unibank (BDOUY), JG Summit (JGSHF) and Ayala Corp (AYALY). These have weights of 9.4%, 9.1%, 7.7%, 7.4%, and 6.7%, respectively. EPHE’s top ten holdings make up 63% of its assets, making it a very concentrated fund.

Shares of Ayala Land have gained 33.9% in 2017 so far, while SM Prime Holdings, BDO Unibank, JG Summit and Ayala Corp have returned 19.9%, 19.8%, 9.9% and 20.1% respectively.

Among the 44 stocks that EPHE invests in, 13 stocks have generated negative returns YTD, while 31 stocks have generated positive returns. YTD, Cemex Holdings (CHP.PM) and Xurpas Inc (X.PM) have been the worst performers within the EPHE ETF. They have plunged 47.6% and 25.4%, respectively, during the year so far.

In contrast, Melco Resorts (MLCO) (MCP.PM) and Rizal Commercial Banking (ECB.PM) have been outperformers and have gained 127% and 51.4%, respectively, during the same period.

Analyst recommendations

Sell-side analysts are most bullish about Metropolitan Bank (MBT.PM), Ayala Land and Megaworld Corp (MEG.PM) as they received the most “buy” ratings. Metropolitan Bank is rated “buy” by 18 analysts, hold by 2 analysts and has received no “sell” ratings presently.

Ayala Land has received 16 “buy” ratings, 2 “sell” ratings and 2 hold ratings while Megaworld Corp has received 14 buy ratings and 2 hold ratings.

In contrast, analysts are most bearish about PLDT Inc (PHI), SM Prime Holdings and Bank of the Philippines (BPHLF) as they has received the most “sell” ratings. PLDT and SM Prime Holdings have received five “sell” each, while Bank of the Philippines has received four sell ratings.

Price to earnings

Stocks within the EPHE ETF trade at an average one-year forward price-to-earnings ratio (or PE) of 16.9x. Among these, Double Dragon Properties (DD.PM) and Melco Resorts & Entertainment are the most expensive, with PEs of 61.2x and 36.3x, respectively. First Gen Corporation (FGEN.PM), Filinvest Land (FLI.PM) and Cebu Air (CEB.PM) are the cheapest among Philippines equities with PEs of 6.5x, 6.8x and 7.1x, respectively.

Fund flows

ETF investors added $24.7 million to the iShares MSCI Philippines ETF during year so far. Comparatively, the Global X South East Asia ETF (ASEA) has witnessed inflows of $1.5 million YTD.

In 2016, investors have redeemed funds worth $107 million and $3.8 million respectively from the EPHE and ASEA ETFs.

Will 7-Eleven’s New Aggressive APAC Expansion Strategy Bear Fruit Or Will Local Competition Bite?

Expansion plans

Japanese (EWJ) convenience store chain 7-Eleven is expanding aggressively. The chain currently operates 62,000 stores in 18 countries across the globe through license and master franchise agreements.

7-Eleven recently laid out its strategy for expansion the US (SPY) and Asia (AAXJ). In the US, the company plans to grow its number of stores to 20,000 from the current 8,500. In Japan, the company plans to open nearly 1,000 new stores in the next one year, while in Vietnam (VNM) the country will open 1,000 stores in the next ten years. The company entered into a master franchisee with Seven System Vietnam to build stores across the country.

In the Philippines, 7-Eleven (EPHE) will open 412 new stores. 7-Eleven operates in Philippines under Philippine Seven Corp. (PSC) the company’s listed local franchise holder. In Thailand, CP All operates 7-Eleven 9,500 stores, the largest network after Japan.

Why focus on Asia?

Asia is a key area of focus for 7-Eleven’s growth. Of the company’s 62,000 stores across the globe, over 30,000 are located in Asia- ex-Japan. 7-Eleven expects to grow its APAC store count to 80,000 by 2020.

The ASEAN is the world’s third largest consumer market, just behind China and India. Nomura, the Japanese investment bank forecasts spending in the five largest ASEAN countries can grow by 50% by 2020. This equates to an annual spending growth of nearly 17%.

“I can tell you (Asia has) been quite attractive and a number of licensees are growing,” 7-Eleven spokesperson Margaret Chabris said. 7-Eleven’s President Kazuki Furuya also dismissed concerns about a slowdown in Japan’s retail sector. “If convenience stores continue to evolve, there will be chances (to grow),” he said.

In the US

7-Eleven is eyeing opportunities for aggressive growth in the United States as well. In May 2017, it acquired 79 convenience stores from CST Brands Inc. for $408 million. More recently, 7-Eleven acquired nearly 1000 gas stations and convenience stores from Sunoco (SXL) as part of its aggressive plan to expand its footprint in the United States. This acquisition will cost $3.3 billion and is expected to boost the company’s operating profits by 6%. One of the largest acquisitions by 7-eleven, this deal would boost the number of stores in the US and Canada to 9,815. By fiscal 2019, the company targets increase its store count in North America to 10,000

Rising threat of competition

Competition is heating up for 7-Eleven as it tests the water in new markets. In markets like Malaysia (EWM), Singapore (EWS), Thailand (THD), Philippines and Indonesia (EIDO), the company has marked its presence and occupies a large market share. However, in newer markets, the company faces growing threats from local players. In Vietnam, prior to 7-Eleven’s entry local real estate company Vingroup came to market with convenience stores named Vinmart+. Furthermore, rising competition from online-retailers like Amazon and Alibaba is threatening 7-Eleven’s market share in established countries.

Is 7-Eleven’s stock running out of gas?

7-Eleven is currently publicly listed in Japan, the Philippines, Thailand and Malaysia. Year to date, shares of the Japanese parent company Seven & I Holdings have gained 7% while its Malaysia counterpart, 7-Eleven Malaysia Holding Berhad have lost 4.9%.  In the Philippines, the company is operated by PSC All, while in Thailand it is run by CP All. Shares of the companies have returned 24% and -1.2% in 2017 so far.

Recently, CIMB Research re-iterated their “reduce” rating on 7-Eleven Malaysia Holding Berhad on expensive valuations and the company’s rights issue. “7-Eleven is currently trading at 37 times FY17F and 33x FY18F P/Es, which, in our view, seems rather excessive against its modest three-year EPS compounded average growth rate (CAGR) of 11.5%,” it said.

“We are negative on this as we estimate that the proposal will be dilutive to our FY18F EPS forecasts by c.15% (assuming full warrant conversion) due to the expansion of share base and the exercise price of the warrants is 32% below 7-Eleven’s theoretical ex-rights price of RM1.48, based on the announcement.”

After An Exceptional Five-Year Performance, Do Philippines Stocks Have More Room To Run?

Emerging Markets from Asia have been the best performers among regional markets over the past five years. That is why, three of the four markets in this review are from the continent; the third one being the Philippines.

Philippines stocks are the only ones, apart from the UAE, India, and Taiwan, which meet our shortlisting criteria of 8% annualized returns over the past five years for this series. This is measured by the MSCI Philippines Index.

ETF performance

There is only one ETF available to US investors for investing in Philippine equities: the iShares MSCI Philippines ETF (EPHE).

According to Bloomberg data, net inflows of $32 million have been seen in this $200 million ETF so far this year. However, US investors have not been too keen on this ETF in the medium-term as the fund has witnessed net outflows amounting to $145 million over the past three years.

Those investors which have braved the rocky stock market over the medium-term, have been rewarded for their patience by the industrials, real estate, and financials sectors.

While SM Investments Corporation (SMIVY) and JG Summit Holdings, Inc. (JGSHF) have powered returns from industrials, SM Prime Holdings, Inc. and Ayala Land Inc. have done the same for the real estate sector. The latter three are the top three largest holdings of the EPHE and form a combined one-fourth of the fund’s assets.

Rounding off the top five holdings are BDO Unibank, Inc. (BDOUY) and Ayala Corporation (AYALY), which have led gains from the financials sector.

View on Philippines stocks

With its top six holdings, which form 46% of the portfolio, the EPHE has done quite well in the past five years. This performance has flowed into this year as well.

The MSCI Philippines Index has returned a remarkable 14.7% in YTD 2017. However, in Asia, which continues to lead the broader emerging markets equities, this performance places the Index only sixth among 10 that MSCI computes for the region.

The macro picture of the country remains solid. Finance Undersecretary Gil Betran, chief economist of the Department of Finance, recently informed that the country’s economic growth stood at about 7% in the first quarter of this year. Inflation also remains under control. Further, the country’s stocks were able to seemingly shrug off the martial law declared for Mindanao.

However, there is an area of caution: Philippines stocks are not cheap. The EPHE has a price-to-earnings ratio of 20.32, making it one of the more expensive markets in Emerging Asia. Due to this investors should be a bit cautious while initiating fresh buying positions in the country’s stocks.

With 13% Of Frontier Fund Assets in Cash, Franklin Templeton Is Preparing To Move Into These Two New Markets

Over 13% of portfolio assets in cash

Franklin Templeton’s Frontier Fund, the TFMAX, currently has over 13% of its equity in cash. According to Carlos Hardenberg, director of frontier markets (FRN) (FM) at Templeton Emerging Markets Group, the move is tactical rather than defensive. It is a part of an exercise regarding Franklin Templeton’s planned move into certain markets in Asia which it was not in before, such as the Philippines (PHE).

For more on Philippines read, which countries are the top sources of investment in the Philippines.

Getting ready to get exposure to Egypt

Hardenberg also identified Egypt (EGPT) as a major potential recipient of the cash that Franklin Templeton currently carries in its Frontier Fund portfolio. “Egypt used to be a closed market…but now, once again it is opening up,” said the frontier fund manager. “Franklin Templeton is getting ready to get exposure to this market.”

Interestingly, Egypt is currently among the top 3 investment destinations in Africa. From 2013 to 2016, Egypt has consistently stood amongst the top ten in the Africa Investment Index (AII). For 2016, Egypt secured itself in third place with the AII. Appropriate and effective reforms have recently placed the country on even stronger footing now.

Economic indicators and valuations reflect strength

The economy is currently expanding within a 3-4% range (3.4% as of 3Q16); the unemployment rate is down from 13.3% in 2Q14 to 12% as of 1Q17. Inflation is high at 31.5% as of April 2017, albeit the rate of increase in the inflation rate has tapered in 2017 as compared to 2016. On the valuations front, investing in Egypt is currently cheap. The VanEck Vectors Egypt Index ETF (EGPT) trades at a P/E of 9.21 (as of May 26). Industrials stocks in the EGPT have returned 25.88% YTD and currently trade at an attractive valuation of 2.86 price-to-earnings. Consumer discretionary, trading at 9.06 P/E has returned 34.10 YTD. Materials, with a 20.27% return are trading at 11.56 P/E. The EGPT portfolio has returned 6.85% YTD.