Malaysia And The Philippines: Co-existing With The Chinese Dragon


Lost in the daily media speculation about how China's economic slowdown will affect the world is the fact that some Asian countries are doing quite well. Malaysia's GDP grew 5.1% during the fourth quarter of 2013, led by stronger-than-expected manufacturing and services sectors. The Philippine's GDP grew 7.2% during the same period—a remarkable success by any standard, and even more impressive when we remember that Hurricane Haiyun, in November 2013, killed an estimated 6,000 and cost billions of dollars in lost business.

Situated on the vital Straits of Malacca waterway, Malaysia has long been a trading hub between Asia and the Middle East. Since prior to 1,000 AD, Malaysia has been home to Buddhist, Hindu, Islamic and western rulers. It finally became an independent country in 1963. After independence, and seeing the success of the four Asian Tigers (South Korea, Taiwan, Hong Kong, Singapore), Malaysia committed itself to transitioning from a “third-world” exporter of commodities to a multi-sector economy.

Malaysia’s transition has been successful. Once dependent on rubber, palm oil and tin, Malaysia today is a middle-income country with a healthy multi-sector economy based on services, manufacturing and high-tech products; it is one of the world's largest exporters of semiconductor components and devices, electrical goods, solar panels, and information and communication technology (ICT) products. In 2012, the economy of Malaysia was the third largest in Southeast Asia, behind more populous Indonesia and Thailand, and the 29th largest in the world, with a GNP of US$ 492.4 billion and per capita income of US$ 16,922. Its 2012 inflation (CPI) was only 1.9% and unemployment an enviable 3.2%.

Malaysia’s main export partners are Singapore (15%), China (13%), Japan (12 %), the EU (9%), the US (9 %) and Thailand (5.4%). Its import partners are China (15.1%), Singapore (13.3%), Japan (10.3%), the US (8.1%) and Thailand (6.0%).

One example of Malaysia's favorable investment climate and workforce productivity is Freescale Semiconductor (FSL). (Sadly, FSL is among the casualties of the missing, presumed destroyed, Malaysian Air jet; 20 of its engineers and senior technologists (12 Malaysian, 8 Chinese) were on their way to China to implement new systems at FSL’s Tianjin facility.) In 1972, FSL built a plant in Petayang that assembles microprocessors, microcontrollers, digital signal processors, mixed signals and radio frequency (RF) integrated circuits (IC) for the networking and computing systems, transportation and standard product systems, and wireless and broadband systems markets.

Malaysia has worked hard to emulate Singapore in using high-tech to boost education and middle-upper income job growth; FSL’s facility has been repeatedly recognized by the Malaysian government for its contribution to the development and growth of human talent, a benchmark for sustainable development and prosperity, and advancing the well-being of Malaysia.

Malaysia’s stock exchange, the Bursa Malaysia, offers the same products of any western exchange. There are currently 817 companies listed on their main exchange and 117 on their Ace (secondary) exchange. Investors trade shares, REITs, ETFs, TSR/warrants, bonds, derivatives, currencies and commodities. The Bursa Malaysia is also the world's largest Islamic banking and financial center as their Islamic Markets team built a trading platform dedicated to the development of Sharia-compliant capital markets products.

Currently there are no Malaysian ADRs on the NYSE, although ten companies trade on the OTC. The sole Malaysian-only ETF is iShares Malaysia ETF (EWM). Launched in March 1996, EWM currently has US $ 786 million under management. Its top five investments mirror the Malaysian economy: financials (29.66%), industrials (12.98%), utilities (12.52%), telecommunication services (11.88%) and consumer/discretionary (10.38%). The December 31, 2013 results show a 1-year return of 7.09%, 3-year return of 6.57%, and an incredible 20.08% 5-year return.

Global X's FTSE ASEAN 40 (ASEA) includes Malaysian companies (25.59%), and those from Singapore, Indonesia, Thailand and the Philippines. Founded in February 2011, ASEA’s returns (as of 12/31/13) are -4.06% (1-year) and 6.73% (2-year).

Best known for its agricultural exports, the Philippines is the world’s largest grower and exporter of coconut, pineapple and abaca. It is also a major exporter of electronic products, such as processors, chips and hard drives. In fact, its electronics exports, now at 40% of all exports, now significantly dwarf its agricultural exports, which account for7% of exports. The Philippines ‘diversified industrial sector generates additional exports of woodcrafts and furniture (5 %), metal components (3 %), and wiring sets (3 %).

Services are the biggest sector of the Filipino economy, accounting for 57% of total GDP. The Philippines is considered a location of choice for call-center operations due to lower operations and labor costs, and a highly skilled workforce proficient in American-style English and idioms. According to the Call Center Directory of the Philippine Economic Zone Authority (PEZA), the Philippines now has more than 1,000 call centers handling all types of customer relations, ranging from travel services, technical support, education, customer care, financial services, and online business-to-customer and business-to-business support. The call center industry is the fastest growing industry in the country and the Philippines is also a leading destination for the estimated $150 billion business process outsourcing industry.

Such financial strength is reflected in the Philippine Stock Exchange (PSE), which is one of the oldest exchanges in Southeast Asia. The PSE is up 7.3% YTD and down only 2.52% for the year (as of 3/13/14), despite both Hurricane Haiyun and the so called emerging market collapse. One hundred thirty-five companies trade on the PSE, which is accessible to the American investor through iShares MSCI Philippines ETF (EPHE), which tracks the MSCI Philippines Investable Market Index. EPHE is up 9.02% over the three-year period ended 12/31/13. The MSCI Philippines Investable Market Index holds 44 companies: services (38.35%), industrials (26.79%) and telecommunications/utilities (18.34%). Additionally, 42 Philippine companies trade on the US OTC. These include well-known names, such as San Miguel Beer (SMGBY), Bank of the Philippine Islands-BPI (BPHLY) and Nickel Asia (NIKAY), one of the world's largest nickel operations.

Both Malaysia and the Philippines are rich in natural resources. The Philippines has significant reserves of chromite, nickel, copper, coal, gas and oil. Malaysia has oil and natural gas reserves. All of these energy reserves lie in the South China Sea, and both countries have experienced China's brazen attempts at nautical intimidation. Instead of a diplomatic or public protest, Malaysia’s response was to quietly step up cooperation with the Philippines and Vietnam, and draw closer to its top security ally, the United States. Both Malaysia and the Philippines know they are not a match for China militarily, but understand that strengthening their economic ties with the United States, Japan, and their fellow members of the Association of Southeast Asian Nations (ASEAN) benefits investors and all concerned—as their 2013 economic results clearly demonstrate.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , International , ETFs , Investing Ideas

Referenced Stocks: FSL , EWM , ASEA , EPHE

Peter Kohli

Peter Kohli

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