VWO Vanguard FTSE Emerging Markets

The Malaysia ETF has gone through a rough patch in 2013. Political uncertainty in the initial phase, and then the expected cease of cheap dollars on the ‘Taper’ concern as well as slow-but-steady growth in the U.S. against a relative slowdown in emerging markets –played a big role in upsetting the country.
 
The World Bank also slashed its growth forecast for the Malaysian economy in early October  to 4.3% for 2013 and to 4.8% for 2014. Prior to this, the World Bank trimmed its Malaysian forecast to 5.1% from 5.6% in late-July, citing current-account woes first time since 1997.
 
However, the scenario seems to have taken a turn just before the New Year. This is evident from the pretty decent economic scorecard posted recently by the third largest Southeast Asian economy (read: Malaysia ETF Surges on Election Result).
 
Export Boom Grabs Attention

Malaysia's exports jumped 9.6% year over year in October against a forecast of 6.1% growth thanks to the recovery in its major trading partners – China, ASEAN, Australia, the European Union, Hong Kong, Korea and India. October numbers – representing a five successive month of expansion – went up 6.1% sequentially.

Import growth (13.9%) in the month-under-review more than doubled from the economists’ expectation. This was driven by increases in imports of intermediate goods which should give another boost to the exports in the final two months of the year.

Exports comprise more than half of Malaysia’s GDP thus becoming instrumental in driving economic activity. The nation’s FTSE Bursa Malaysia KLCI Index climbed to a record high following the export data release.

The country’s trade surplus remains steady. Malaysia is one of the only countries in Southeast Asia that has a decent current account balance at present. Though many had expected the country to fall into a deficit trap due to poor exports earlier this year, Malaysia narrowly escaped that and is now comfortably in the surplus zone.

GDP Picture ‘Not-So-Bad’

Malaysian GDP growth speeded up to 1.7% on a quarter-on-quarter basis in Q3, up from 1.4% recorded in Q2. Improvement in private investment coupled with the surge in net exports aided the economic output.

This trend should continue even in the final quarter of the year as the country fared better in terms of industrial production in October, with 1.7% year-over-year and 0.7% sequential growth. Notably, economists expected the industrial activity to slump 0.8% quarter-on-quarter.

The government is also implementing a goods and services tax to reduce the fiscal deficit. The country’s finance ministry issued  growth guidance in late October which assumes 4.5–5% economic expansion this year and 5–5.5% in the next. No matter how the economy is rolling, the GDP growth expectation is surely better than many developed nations as well as developing ones in the region too.

Decline in Debt-to-GDP Ratio

A much alarming component in the Malaysian economy was a high debt to GDP ratio, be it on government (~50% in 2012) or household (~80% in 2012). Some even believe that this sky-high credit level is basically facilitating Malaysia’s economy to grow around 6% range in the recent years.

However, the nation progressed on this front as well, though a little bit. The rise of the household debt-to-GDP ratio fell to 2.5% in Q3 from 3.2% in the preceding period thanks to the central bank’s measure. Also, as a relief, the amount of non-performing loans remains low among household indebtedness (read: Time to Buy the Top Ranked Malaysia ETF?).

Given these trends, a look to a Malaysian investment might be an intriguing idea. Fortunately, investors have this with the Malaysia ETF, which we have described in greater detail below:

iShares MSCI Malaysia ETF (EWM) in Focus

The fund looks to track the performance of the Malaysian equity market. The fund invests about $853 million in assets in 44 holdings. The fund is concentrated in the top 10 holdings which account for as much as about half of the total.
 
The ETF charges a reasonable 49 bps in annual fees. The fund is heavily exposed to financials that make up for about 30% of the share in the basket followed by the industrials and utilities sectors (see more in the Zacks ETF Center).

The most striking part is the fund’s return. EWM added about 11.2% in the year-to-date frame (as of December 10) while the broader emerging markets funds like Vanguard FTSE Emerging Markets ETF (VWO) and iShares MSCI Emerging Markets Index Fund (EEM) lost 1.15% and 0.43% respectively. EWM currently has a Zacks ETF Rank #3 (Hold).

Conclusion

While things are not yet fully over the hump, the country might be an intriguing pick for investors planning a portfolio reshuffle going into the New Year.

Yes, the taper issue is looming large, but we believe analysts have already adjusted this much-hyped concern in their forecasts. And even after the adjustment – which should take into account reduced investment – forecasts look fairly encouraging compared to many other emerging nations, suggesting that EWM might be a solid choice for 2014.

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ISHARS-EMG MKT (EEM): ETF Research Reports
 
ISHARS-MALAYSIA (EWM): ETF Research Reports
 
VANGD-FTSE EM (VWO): ETF Research Reports
 
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