Why investors are ignoring Duterte’s belligerence

Rodrigo Duterte has courted controversy ever since he began campaigning to become Philippine president last year.

Three months into his administration, the 71 year-old has offended dignitaries included Pope Francis and US President Barack Obama with obnoxious tirades. He has also been linked with the extrajudicial killings of alleged drug dealers that are believed to have caused the deaths of over 2,500 people.

Thus far Duterte has proven highly popular with Filipinos, many of whom are frustrated with growing drug use in the country and feel excluded from its economic improvement. But the new president’s unpredictability and apparent disregard for judicial due process offers disconcerting reminders of previous authoritarian leaders.

For investors, this raises pressing concerns about what has been one of Asia’s strongest growing economies in recent years. Could Duterte’s seeming disregard for human rights and diplomatic bridge-burning damage the country’s appeal as an investment destination?

To date, the answer among most investors seems to be: no.

AsianInvestor spoke to several fund managers who invest in the Philippines or emerging markets. Opinion within the fund management industry is mixed, but many fund managers feel Duterte’s erratic behaviour to date is an acceptable risk for getting access to the Philippines’ appealing capital markets.

Last week, the Philippine Stock Exchange index (PSEi) fell 2.89% to 7,581.79, with analysts attributing the decline to a series of unfortunate events, including a looming US Federal Reserve hike. 

Duterte’s rant at Obama, in which he was videoed threatening to call the US president a "son of a whore" to his face for being willing to question his commitment to human rights (he later said he told Obama he didn't say it), was also cited as having added to the uncertainty. Investors deem that the Philippines cannot afford to strain ties with the US, the same report said.

Yet despite this upset the PSEi was up almost 11% year to date on Monday, while the country's 10-year sovereign bond yield has tightened from 4.11% in the first week of January to 3.41% on September 11. The Philippines remains a very appealing market. 

Performance over politics

Despite an increasing commitment to environmental, social and governance responsibilities (ESG) among global fund managers, most investment manager AsianInvestor spoke to felt it was not their job to chastise the Philippine government or leadership over social issues, particularly if these factors don’t threaten its economic stability.

While Duterte's outbursts may offend other world leaders, fund managers think his administration’s economic policies are sensible. Duterte has never professed much interest in economic policies, and has so far delegated much of the job to Finance Secretary Carlos Dominguez, whom international bankers hold in high regard.

Dominguez’s proposed policies to further infrastructure investments and reduce income and corporate taxes have been well received by investors, while the crackdown on drugs hasn’t had any perceivable negative influence. His government is reportedly proposing several tax reforms, including cutting the maximum personal income tax rate from 32% to 25%, except for top earners, and offering more tax relief for earners in lower tax brackets.  

“Investors focus on economic policies and how these affect companies’ objectives. So far, Duterte’s drug-busting activities have not had a negative impact on the larger economy,” said a lead manager at an emerging markets-focused institution.

London-based Jason Pidcock, portfolio manager of the Jupiter Asia Pacific Income fund, had a similar view, telling AsianInvestor: “[Our] overweight position in the Philippines remains.”

“President Duterte has made an impressive start to his presidency and I believe the country will benefit from his no-nonsense approach,” added the 22-year Asia fund veteran.

He asked AsianInvestor to refer to his July commentary on why he favours the Philippines: a rapidly growing economy, favourable demographic trends, low levels of debt and a largely benign political backdrop – making it a rising star economy in the region.

“Of all the investible countries in the Asia Pacific region, the Philippines has arguably the most promising macroeconomic story. GDP per capita is low at roughly $2,900 per person (that’s less than half of Thailand’s),” he wrote.

“Not only is it the fastest growing Asian economy – sustainably at more than 6% annually – the country’s demographic profile is such that I believe its businesses, particularly in consumer sectors, will see sustained growth over the long term.”

Baring Asset Management’s $480 million Asean Frontiers Fund is also overweight on the Philippines. Soo Hai Lim, its lead manager, told AsianInvestor that Duterte was controversial but effective. He declined to comment on the president’s controversial approach to drug use, saying it was a sensitive issue.

Uneasy times

But a few fund managers have started feeling uneasy about Duterte’s style of governance.

One Hong Kong-based manager, who declined to be named, told AsianInvestor: “We have funds investing in the Philippines. We are considering reducing our overweight position.”

He added: “My concern on the Philippines is the consequence of [Duterte’s] approach and the impact on the economy going forward. If people do not feel safe and stable, it will affect the economic fundamentals at some point. The politics may impact the good momentum of the Philippines.”

CNN has also reported Duterte's political controversies could weigh on the markets if not resolved soon.  

The Hong Kong fund manager believed portfolio managers should factor social issues into investments. 

“There are two sides to investing: one looks at only the fundamentals [of the market and stocks] and the other applies ESG factors. The Philippines has a big question mark in corporate governance,” he said.

He conceded that portfolio managers currently apply ESG factors from a bottom-up perspective, focusing on stocks not countrywide or government factors.

“It’s not the way ESG is set up for,” he said. “This is not included in the discussions even in ESG-focused investment. Maybe they [ESG policy setting organisations] should expand the definition of ESG a bit more.”

For fund managers, the need to pursue their fiduciary duty to maximise returns for their clients outweighs personal misgivings they may have over the choices made by a country’s leader. In the case of the Philippines, the country’s demographic potential and economic momentum still outweighs the controversy its colourful new president courts with his brutal war on drugs.

But that attitude may well have to change. Some of Asia’s largest asset owners, including Japan’s Government Pension Investment Fund and Taiwan’s Bureau of Labor Funds are increasingly looking for their fund managers to incorporate ESG concepts when making investments. Today’s ESG strategies may not adequately incorporate political risk or human rights, but this is unlikely to remain so forever.

The days of fund managers disregarding the social costs of actions and policies of leaders such as Duterte amid the hunt for returns could soon come to an end.