Emerging markets have clearly been out of favor with investors
for the past few months. Slow growth in some of the key emerging
economies and slow but steady growth in the U.S. economy led to a
sell-off in these markets. They were further hurt by the Fed's
Malaysia seemed to one of the brighter spots in the emerging
markets investing this year as iShares MSCI Malaysia ETF (EWM)
had an almost flat return year-to-date versus 12% loss for the
broader iShares MSCI Emerging Markets ETF (EEM). (Read:
The Best ETFs in the market's top sector
The ETF was hit earlier this year by the political uncertainty
in the country but it surged after the election results. Even
though election did not result in majority win for the ruling
party and there were widespread protests after the election on
allegations of electoral fraud, investors clearly cheered the
victory and sent the Malaysian stocks higher.
Like many other emerging countries, Malaysia had also seen a
surge in portfolio inflows in the last few years, thanks to
sluggish growth and ultra-low interest rates in most of the
developed countries. (Read:
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Increasing concerns about the reversal of these flows due to a
strengthening US dollar and rising rates in the US are currently
acting as significant headwinds for these countries. And, a
robust domestic demand in many of these economies is not able to
offset weakness in the external environment.
Fitch downgrades the outlook
Earlier this week, Fitch Ratings
its outlook on Malaysia. According to the rating agency,
"Malaysia's public finances are its key rating weakness. Federal
government debt rose to 53.3% of GDP at end-2012, up from 51.6%
at end-2011 and 39.8% at end-2008".
Per Fitch, the country faces two key budgetary
vulnerabilities-its reliance on petroleum-derived revenues (33.7%
of federal revenues in 2012) and the high and rising weight of
subsidies in expenditure.
Malaysian Economy in Focus
While the country has gradually reduced its dependence on
exports in the last few years, exports still account for more
than 50% of the GDP, leaving the country vulnerable to the
challenging external environment. Also, with an already high
household debt to GDP ratio (~80%) and the recent measures taken
by the central bank to restrict the household debt, further
expansion in domestic demand may not be easy.
Last week, the World Bank cut its forecast for Malaysia's
economy to 5.1% in 2013, down from 5.6% last year and said that
the country is at risk of recording its first current-account
deficit since 1997. (Read:
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The Malaysian ringgit is down 6.3% against the US dollar in
2013, which however, doesn't look too bad if we compare it to the
some other currencies in the region; the dollar has surged 13%
against the yen and 10% against the Indian rupee this year.
The central bank left its key rate unchanged at 3% during its
latest policy meeting. Inflation has remained low during the
first half and even though the central bank expects it to pick up
modestly during the second half, it may keep the policy rates
It remains to be seen whether the new administration will
accelerate reforms and remain on track to achieve its ambitious
plan to join the ranks of high income countries by 2020.
Hopefully the outlook downgrade will act as a wakeup call for the
iShares MSCI Malaysia ETF (
EWM which made its debut in 2006 now has $961 million in AUM
which are invested in 43 securities.
The fund charges 53 basis points in fees annually. As of now,
it is concentrated in financials which account for almost 31% of
the asset base, with industrials (13%) and telecom (12%) rounding
out the top three.
EWM is currently a Zacks Rank#3 (Hold) ETF.
Despite some weakness after the downgrade, the product has
outperformed the funds tracking Malaysia's regional peers like
), Philippines (
) and Indonesia (
) and as well as broader emerging markets ETF (
) in the past three months.
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ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS PHILP (EPHE): ETF Research Reports
ISHARS-MALAYSIA (EWM): ETF Research Reports
MKT VEC-INDONES (IDX): ETF Research Reports
ISHRS-MSCI THAI (THD): ETF Research Reports
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