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[SINGAPORE] Philippine markets have been heavily sold down since July, primarily for economic reasons, not the festering row between new President Rodrigo Duterte and traditional ally the United States over his war on drugs, money managers say.
A slowdown in remittances from Filipinos working overseas, which have historically been a big driver of growth in the South-east Asian nation, is a cause of concern.
For bond investors, a bigger concern is the heavy correlation between Philippine bonds and US Treasuries, and the potential for Philippine bond prices to drop as market participants prepare for the Federal Reserve to raise its near-zero rates.
"Everybody's pointing to Duterte," said Erwin Balita, a fund manager at BPI Asset Management in Manila.
"But for me, it's really the fundamentals of the country. The drop in remittances is a big game changer," he said. BPI manages around 700 billion pesos (S$19.85 billion) in the Philippines.
The stock market, one of Asia's outperformers in 2015, has fallen 4 per cent since late July. In the same period, MSCI's Asia ex-Japan index has risen 5.3 per cent.
The peso has borne the brunt of the exodus of foreign investment and is down 5 per cent against the US dollar since July. It is down 2.4 per cent this year, making it the worst performing currency in the region after the yuan.
Yields on 15-year US dollar bonds issued by the Philippine government, one of the most liquid on the market, have risen 17 basis points since July.
The Philippines is one of Asia's most active issuers of US dollar-denominated bonds. With Asia's second-highest growth rate, it has been a haven for yield-hunting foreign investors over the past couple of years.
Yet, those bonds have been volatile in recent weeks.
"People think that Treasury rates are going to go up and that is the reason why the role of Philippine bonds being a Treasury proxy is negatively affected," said Arthur Lau, a fixed income portfolio manager at PineBridge Investments.
PineBridge, which has US$42 billion of Asian assets under management, has been neutral to underweight on Philippine assets across its funds this year.
The low yields and already tight spreads on Philippine bonds would leave holders vulnerable to a rise in US dollar yields, and the selling showed investors were protecting themselves against a possible Fed rate rise, Mr Lau said.
Mr Duterte's rhetoric was an additional factor, he said.
"People are somewhat concerned about the near-term political environment," Mr Lau said, adding the market was reacting defensively for both fundamental and technical reasons.
"That is why we see the underperformance."
Mr Duterte took power on June 30 and his focus on building new infrastructure won him plaudits from business leaders. Even his war on drugs and crime was seen as a positive at the time.
But over 3,400 people have been killed by police and suspected vigilantes since then and Mr Duterte has insulted US President Barack Obama, the United Nations and the European Union for questioning his campaign. The new president has also courted Russia and China and said he would end joint military exercises with the United States.
For now, US officials say they are doing their best to ignore Mr Duterte's hostile rhetoric and taking comfort in the fact that he has yet to translate his words into less military cooperation.
Prashant Singh, a Singapore-based senior portfolio manager at fund manager Neuberger Berman, said the peso's decline was due to a sharp fall in the Philippines current account surplus in the past few months and the possibility that Mr Duterte's proposals on improving investment and infrastructure could lead to more imports.
But he added: "The geopolitics is not helping the peso at the margin," referring to the Duterte administration. Neuberger Berman switched to being underweight on the peso two months ago.
The Philippines' current account surplus in the second quarter shrank to US$65 million from US$3.2 billion in the year-ago period, mainly owing to a rise in imports and flat remittances.
Remittances from millions of Filipinos working overseas have traditionally funded the private consumption that drives three-fourths of the Philippine economy. However, flows until July totalled just US$15.32 billion, up only three per cent against the year-ago period, because of the slow global economy and a depreciation in currencies of host countries.
That means the hitherto stable economy, which is expanding at seven per cent, will eventually have to wean itself off its dependence on remittances and find new growth drivers.
Meanwhile, one fallout of Mr Duterte's erratic behaviour is likely to be the Philippines' sovereign ratings. Standard & Poor's rating agency has warned that the unpredictability over his policies could undermine the chances of an upgrade for the Philippines and might even lead to a downgrade of the country's BBB/A-2 investment grade rating.
"Rating downgrade risks are among the highest risks for the Philippines which would lead to more outflows across Philippine assets - equity, bonds and FX," said Alvin Maala, senior portfolio manager with the Asian fixed income team at Nikko Asset Management in Singapore.