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Last week's deadly typhoon in the impoverished southern portion of the Philippines obscured what has been a year of remarkable achievement for the island nation. Pushed by a surge in consumption, the Philippine economy expanded at a 7.1% year-over-year pace in the third quarter, second only to the 7.4% growth of Asia's perennial leader, China.

The storm delivered a devastating human tragedy, with more than 500 deaths reported by Friday, but it won't have more than a small temporary economic effect because it was mostly confined to rural areas. Manila should quickly regain its recent stride under President Benigno Aquino III. The country's central bank has been able to cut its benchmark interest rate four times in the past 12 months to a record-low 3.5% since inflation is running below 3%. Budget deficits have been reined in. And the Aquino administration is now readying a boost in infrastructure spending, a program likely to get added backing following the storm. The government already has ambitious plans to improve air, rail, and road "connectivity," says Hak-Bin Chua, an economist for Bank of America Merrill Lynch in Singapore. "The Philippines is the turnaround story in Asia," he says.

Investors have taken note. The Philippines' main stock-market index is up 32% this year. "It has been a great year," says Alfred Dy, head of research for CLSA in Manila. Mostly off the radar of foreign investors, the volatile index is up nearly sixfold over the past decade. Only the Indonesian market's tenfold gain in that time has done better in Asia.

Can the gains continue? Yes. With its young, growing population, the Philippines should enjoy a demographic dividend that aging Asian societies like Japan, Korea, and Taiwan won't. The nation will have the region's fastest-growing labor force over the next decade, with more than a 30% rise in its work force. "That's very positive for sectors like consumer, banking, and infrastructure," says Alex Pomento, head of research at Macquarie Securities in Manila. Dy estimates remittances back home from the many Filipinos working abroad will rise about 5% next year.

The archipelago has other advantages. Corporate debt-to-equity ratios have dropped from 1.5 times 12 years ago to 0.6 times, giving the private sector more flexibility and resilience. Projected loan growth of 15% next year and further monetary easing will push growth. The country's booming business process outsourcing is expected to generate $17.5 billion next year, a rise of 25%.

Caution is urged on certain stocks. Blue chips like beer-to-utilities conglomerate San Miguel Corp. and banking- and property-based Ayala Land Inc., favorites of overseas investors, look fully valued at over 20 times this year's earnings. That's a big premium over the Philippine market.

More reasonable, says Dy, are conglomerates Metro Pacific Investments Corp., and JG Summit. Metro Pacific focuses on property and infrastructure and trades at 13.6 times next year's earnings. Dy has a 5.7-peso (14 US cents) price target, or 26% upside. JG Summit has broad exposure to the consumer sector through property, hotels, packaged food, and telecom as well as a low-cost airline. Dy has a 41-peso price target on JG Summit, which trades at 13 times next year's earnings.

Arguably the best play for US investors is the $150 million in assets iShares MSCI Philippines Investable Market Index Fund (EPHE), which has risen 47.7% this year. It could just be getting started.

(Assif  Shameen covers Asian markets from Singapore This articles was carried by Dow Jones) (http://is.gd/E2kxOr)

Manila Bulletin / Dow Jones

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