Throughout the first half of 2009, emerging market ETFs have been a hot discussion topic and investment option, with much of the attention focused on stellar returns to BRIC funds and the boom in the Chinese real estate market. While that attention is much deserved, these behemoths have overshadowed an investment jewel in Southeast Asia that remains hidden to most American investors. That jewel is Malaysia: a small nation straddling the South China Sea that is home to about 28 million people and one rapidly industrializing economy.
Malaysia’s economy, unlike those of many emerging and frontier markets, is very well diversified. It is blessed with an abundance of natural resources, including oil, rubber, and tin, and is a leading exporter of palm oil (which makes a very efficient biodiesel fuel). Due to the high Islamic population, Kuala Lumpur is fast becoming a center for Islamic finance, which may be a rapid growth area in the coming decade. Malaysia is also home to a rapidly expanding high-tech industry, and is a leading manufacturer of computer parts. And apart from its centers of finance and industry, Malaysia is an aesthetically pleasing locale, complete with lush hills, beaches, and countless natural wonders. In addition to the bustling big cities, this diversity makes Malaysia a hot tourism destination, poised to benefit from an abundance of wealthy neighbors in Singapore, as well as from around the world.
In addition to a well diversified economy, Malaysia has the legal and political structure to ensure steady growth, an important characteristic that is often lacking from growing economies. Doingbusiness.org ranks Malaysia 20th overall for ease of doing business, and number one for “upper middle income” countries. The presence of established and stable political and legal infrastructure gives Malaysia a leg up on other international business centers.
Crossroads of The World
Malaysia is one the world’s great melting pots. As a former British colony, English is widely spoken, yet Islam is the national religion and over a quarter of the population is of Chinese origin. The confluence of East, West, and Mideast cultures makes Malaysia a natural outpost for global business leaders. In addition to being a cultural crossroads, Malaysia is a hub for global trade, doing billions in trade each year with both the United States and China. The Straits of Malacca are one of the most important shipping lanes in the world; over one fifth of the world’s oil passes through their waters, further increasing Malaysia’s importance in the global business environment.
Not Without Its Risks
Like any emerging market, investments in Malaysia come with their fair share of risks. There are worries regarding urban poverty and concerns that the nation’s rising economic tide will lift primarily the middle and upper classes, further widening the wealth gap. In addition, at roughly 40% of their GDP, Malaysia’s debt levels are fairly high, limiting the ability of the government to quickly and efficiently implement policy changes as needed. However, as Malaysia has built up sizable currency reserves and continues to maintain an expanding economy during the broad global downturn, debt will likely shrink as a percentage of GDP going forward. Lastly, the government has been very involved in business over the years, directing many investment programs and providing market planning and subsidy programs.
ETF Options For Playing Malaysia
While many diversified Asia ETFs (such as EPP, VPL, and GMF) include exposure to Malaysian companies, these funds tend to be weighted more heavily towards China, Japan, and Singapore, often allocating less than 10% to Malaysia. iShares MSCI Malaysia Index (EWM) tracks a cap-weighted index that aims to capture 85% of the total publicly-available Malaysian market capitalization. Financials (28.5%), industrials (20.0%), and consumer staples (16.5%) comprise the largest sector allocations of EWM, which maintains about 40 individual holdings. EWM is up nearly 25% year-to-date in 2009.
Eric Dutram contributed to this article.
Disclosure: No positions at time of writing.