As the markets of the U.S. and Western Europe have encountered problem after problem, investors are giving increasingly large weightings to Asian equities. Investors focused on Asia have generally gravitated towards China, India, and South Korea–three markets that have performed well over the last year. But it is another Asian economy that has stolen the show in 2010, as Malaysian equities have tuned in an impressive performance.
On Thursday, the Central Bank of Malaysia announced the second hike to its key overnight interest rate since March, responding to concerns that the economy was expanding too briskly. After cutting rates from a 3.5% peak in late 2008 to 2% in February 2009, Malaysia has hiked rates by 50 basis points to 2.5% as economic expansion for the first quarter reached its highest level in over a decade. Rate hikes are usually a negative development, but the central bank’s action has done to take the luster off of Malaysia.
That’s in part because the Malaysian government also retracted its previous GDP growth growth forecast of 4.5% to 5.5%, and now is predicting that the economy will expand by 6% on the year. “Gross domestic product grew 10.1 percent year-on-year, accelerating from a 4.5 percent expansion in the last quarter of 2009,” said Prime Minister Najib Razak, who is also the finance minister. This impressive growth–and a bullish outlook– has made the iShares MSCI Malaysia Index Fund (EWM) one of the top-performing equity ETFs in on the year. EWM has gained about 13.5% year-to-date, putting it well ahead of other ETFs in the Asia Pacific Equities ETFdb Category. Most ETFs in the category are still in the red on the year; the South Korea Index Fund (EWY), which has gained almost 4% on the year, has come the closest to matching EWM’s stellar performance.
Economic Explosion
Manufacturing and exports makes up a major sector of Malaysia’s economy. International Trade and Industry Minister Mustapa Mohamed confirms that Malaysia’s ”exports are doing well, many industries are hiring new people, private consumption is improving despite the global economy picking up slowly.” In recent months Malaysia has taken steps to address rampant corruption that some economists believe is the primary obstacle to developed status (see Malaysia ETF In Focus As Overhaul Swirls). Malaysia’s ambitions goal known as “Wawasan 2020″ refers to the plan to be recognized as a developed nation by the year 2020.
Malaysia is often referred to as one of the “rapidly developing economies,” a term indicating its status as one of the world’s fastest-growing emerging markets (see a Q&A with Richard Kang on emerging markets ETFs).
Malaysia ETF Surges
EWM measures the performance of the Malaysia equity market, tracking the MSCI Malaysia Index. There are currently about 44 individual holdings in EWM, with the top ten accounting for more than 56% of assets. The biggest allocations are to Sime Darby Berhad, CIMB Group Holding Berhad, and Malayan Banking Bhd Maybank (see the rest of the top ten holdings). From a sector perspective, EWM has nearly 65% allocated to three corners of the economy: financials (31%), industrials (18.6%), and consumer staples (14.9%).
EWM is one of the few equity ETFs to post positive gains in recent sessions; this fund has largely shrugged off turmoil in Europe to post a gain of about 1.3% over the last two weeks (SPY is down about 1.6% and VGK has lost 3.8% over that same period). Malaysia is an interesting investment opportunity for another reason: since inception EWM’s correlation with SPY is just 0.50 (the correlation between EEM and SPY is close to 0.90).
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Disclosures: No positions at time of writing.
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