Yoshikami: The Perplexing Philippines

The Philippines is a country of contrasts.

On one hand, it is a country steeped in poverty with a population largely impacted by a low standard of living. On the other hand, it is a country attempting to assert itself as a player in the Asian economic expansion.

What many people do not realize about investing in emerging markets is that countries tend to concentrate their economic expansion in specific sectors. In the case of the Philippines, the sectors most in demand are outsourcing and service oriented industries.

Multinational corporations rely on the Philippines as an inexpensive outsource destination for various service operations. It's no wonder the Philippines is a choice for many companies as the labor costs are drastically lower (as much as 75%). Call centers, transcription services, financial and accounting activities, and medical research efforts comprise the bulk of the outsourcing activities.

Flag of Philippines
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Flag of Philippines

Companies as diverse as Citigroup and Pfizer seek to capture labor cost differentials in the Philippines relative to more established economies. Additionally, because English is an often used language in the Philippines, the pool of potential hires to work in outsource positions is significant.

Manufacturing is also another strength for this economy though it does operate with a cost disadvantage relative to China.

Still Toyota operates extensively in the country and sells a significant number of automobiles within the Philippines. Clothing manufacturers also produce goods that are distributed and exported throughout the world.

The Philippine peso has come off recent lows which some see as an indication of bubbling optimism that this country might finally return to the better days when Fidel Ramos was president in the 1990s. However, one should temper this optimism with a dose of reality because the comparison is against the US dollar, which is struggling.

As emerging markets continue to capture a greater share of global GDP, many Asian countries will be the beneficiaries of this transition. It remains to be seen if the Philippines can break the cycle of corruption, poverty, and entrenched patterns and move forward to be a major player in the region. But perhaps a benefit of a difficult past is that your future needs only be slightly better to exceed expectations. That could certainly help investors in the Philippines as more economic activity migrate to Asia in the coming decades.

Michael A. Yoshikami, Ph.D., CFP®, is CEO, Founder, and Chairman of YCMNET’s Investment Committee at YCMNET Advisors, Inc., a registered investment advisory firm. He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at m@ycmnet.com