Five years ago, I argued that the Philippines is one of the most interesting long-term economic stories in Asia. In our article, The Late Bloomer (October 24, 2007), I wrote:

“It’s taken the Philippines 10 years to get its economy on the right track. Now, though, its public finances are improving rapidly, foreign direct investment is rising, the Philippine peso is strong, and the Philippine diaspora dutifully contributes almost 10 percent of the country’s GDP.

The latter point is critical: In a sense, people are the Philippines’ biggest export, at least in terms of the reliability of their contribution. Overseas Filipino workers send home USD1 billion to USD1.2 billion per month. That money is usually channeled into real estate, although a portion is used to augment families’ domestically earned income.”

Since then, the country’s economy and stock market have performed solidly. Nonetheless, the usual bears still try to find the proverbial holes in the armor. The most recent negative argument is that the Philippine stock market is too expensive.

The market may be highly valued now, but this ignores the bigger picture. As with neighboring Malaysia, the Philippines boasts a high savings rate and a fast-growing working population, which in turn fuels strong domestic demand and lays the groundwork for future economic growth.

Remittances from Filipinos living overseas are still a crucial pillar for domestic consumption and investment in the Philippines, as domestic employment growth is too sluggish to keep up with rapid population growth. Higher remittances have been boosting domestic demand in the Philippines, where private consumption fuels 77 percent of gross domestic product (GDP).

The Philippines has a working population of 40 million that’s growing faster than that of both Malaysia and Indonesia. The country’s savings rate has grown by 7 percent over the past decade and is now at 27 percent. At the same time, the country’s political situation is stabilizing and becoming more firmly democratic.

Domestic buying has been the major force behind the solid performance of the Philippines stock market so far this year, especially as foreign ownership remains steady. The country has a small fiscal deficit, a current account surplus, a stable currency and USD76 billion in foreign reserves. Meanwhile, Philippine corporations are flush with cash.

The Philippine economy is enjoying rising investment in its growth areas, specifically property and construction, outsourcing, mining and tourism. According to the government’s plans, unlocking infrastructure bottlenecks, tourism and mineral wealth are the next legs to growth. This year, the Philippines should be able to deliver GDP growth above 5 percent.

In May, the country’s exports rose 19.7 percent year over year, significantly higher than the consensus expectation of 6.5 percent. The electronics segment in particular was a positive surprise; although down 0.7 percent YoY, it posted a huge improvement from its 24 percent YoY decline in April.

Export improvement is a big positive, but strong domestic demand will make the difference for the country’s economy as the global economy slows.

Our recommendation is to gain exposure in this market, especially during pullbacks. The easiest way is through the iShares MSCI Philippines Investable Market Index Fund (NYSE: EPHE). This exchange-traded fund (ETF) has gained 24 percent so far in 2012. Barring a global market meltdown, the fund should see more upside this year.