Postcard from Asia: Why tariffs won’t trip up the Philippines

Henderson Far East Income manager Sat Duhra discusses the fresh insights he gathered on his recent travels to the Philippines.

As an investor in Asia, I’ve spent the last month almost exclusively talking about tariffs. Rightfully, as many of the economies I invest in are significantly impacted by a new, albeit tempered, tariff regime and prospective trade war. However, there are Asian countries for which tariffs are less seismic. The Philippines, which I visited last month, is one such case.

In recent years, Filipino economic growth has been driven primarily by domestic and local consumption. The Philippines has low overall exports to the US (at 2% of GDP) and low reciprocal tariffs. It also has a track record of strong performance in rate cut cycles. The central bank, the Bangko Sentral ng Pilipinas (BSP), already cut interest rates by 0.75% in 2024. The recent weakness of the US dollar is likely to encourage further rate cuts.

Together, this environment is broadly positive for the economy, which continues to grow year-on-year. In the short-term, low oil prices, a weak dollar and falling domestic food prices are all supportive too. However, concerns persist. The government seems to be relatively ineffective when it comes to economic investment. Infrastructure development is particularly slow.

What does this mean for me as an investor in the Philippines? During my recent visit, I met with several companies operating in key economic sectors. One is banking. A key theme for Henderson Far East Income Limited is rising financial inclusion. This trend is manifest in the Philippines, with many of the banks confirming their ongoing rollout of new branches in rural areas.

Elsewhere, energy demand is increasing alongside growth. This is positive for the country’s energy companies, some of which I also met. These companies are particularly looking at international expansion as a route to growth, showing commercial acumen.

Why, then, is the HFEL portfolio not full of Filipino names? From a practical standpoint, the market is hard to invest in. Average daily trading volumes – which tell us how easy a stock is to buy and sell – are extremely low on the Filipino exchange. This is partly because foreign ownership is similarly limited. This would present an issue should we need to sell a stock in future, for example if our investment case changed.

Instead, I have gained exposure to the Filipino market and economy through Hong Kong-listed First Pacific. It is an investment holding company, which essentially means it owns stakes in businesses around Asia. The company has exposure to the Filipino utilities market through several companies – a varied spread that allows us to capture some of the trends discussed here.

Of course, this won’t be my last visit to the Philippines. I’ll be keeping an eye on the market and some of the companies I met on this trip, should it or they become more readily investable.

Glossary

Economic cycle

The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.

Gross domestic product (GDP)

The value of all finished goods and services produced by a country, within a specific time period (usually quarterly or annually). When GDP is increasing, people are spending more, and businesses may be expanding, and vice versa. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.

Interest rates

The amount charged for borrowing money, shown as a percentage of the amount owed. Base interest rates (the Bank Rate) are generally set by central banks, such as the Federal Reserve in the US, or Bank of England in the UK, and influence the interest rates that lenders charge to access their own lending or saving.

Tariffs

A tax or duty imposed by a government on goods imported from other countries.

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Henderson Far East Income Limited is a Jersey fund, registered at IFC-1 The, Esplanade, St Helier JE1 4BP, Jersey, and is regulated by the Jersey Financial Services Commission

There is no guarantee that past trends will continue, or forecasts will be realised.

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Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Henderson Far East Income Limited is a Jersey fund, registered at Liberté, 19-23 La Motte Street, St Helier, Jersey JE2 4SY and is regulated by the Jersey Financial Services Commission] Ref: 34V

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