Malaysia ETF Dives 3%; Should You Buy The Dip?
Malaysia's stock market fell the most in 16 months Tuesday on worries over the upcoming election.
IShares MSCI Malaysia Index ( EWM ) gapped down 3.33% -- it's largest one-day drop since September 2011 and the biggest loss globally Tuesday.IShares MSCI Emerging Markets Index ( EEM ) pulled back 0.41%. The sell-off leaves EWM down 2.3% for the month vs. a 0.69% uptick for EEM.
"Whenever there is speculation that Parliament will be dissolved, the market weakens," Credit Suisse research analysts wrote in a client note. "The quality of Prime Minister Najib Razaks' win will be crucial, but the market feels hapless as the potential outcome of the general election is murky."
EWM broke below its 50-day moving average for the first time in a month. But it's only fallen 4% from its 52-week high, which is considered a normal pullback in an uptrend. It trades above its 200-day line, indicating a weak uptrend. It has a rather weak IBD Relative Strength Rating of 45, which means 65% of stocks has outpaced its gains and momentum in the past 12 months.
Its C+ Accumulation/Distribution Rating means institutional buying and selling is about even.
Traders can use the 200-day moving average as a stop loss, or line in the sand at which to sell if it breaks below that level.
EWM returned 14.8% last year vs. 19.1% for its benchmark, iShares MSCI Emerging Markets Index. The Malaysian ETF outperformed in 2011 by losing only 2.7%, while EEM corrected 18.8%. As the No. 1 performing market in Asia on a five and 15-year basis, it returned an average annual 6.5% and 11.84% over those periods.
EWM, with 43 stocks, most heavily weights financials at 31% of assets. Its other weightings are telecom 13%, industrials 13%, consumer staples 11%, consumer discretionary 11%, utilities 10%, materials 5%, energy 4% and health care 2%.
Credit Suisse figures Malaysia's stock market trades at 14.1 times 2013 estimated earnings with earnings growth forecast at 9.3%. It trades at 15.5 times 2012 estimated earnings with earnings growth pegged at 20.9%.
"Our base case assumes that the ruling coalition, Barisan Nasional, wins a majority in the 2013 general election, and there are no major upsets or changes in the general election," Credit Suisse analysts wrote. They believe the election has taken attention away from the country's strong economic growth. They highlighted in their report:
1. Malaysia's GDP (gross domestic product) growth of 5.2% in third quarter 2012, 5.6% in second quarter 2012 and 5.1% in 2011 have surprised the market on the upside.
2. Total investments in Q3 2012 grew 26% year over year, after reaching 30% year over year in Q2 2012 -- the highest rate in at least a decade.
3. Private investments grew strongly at 25%, 28%, 24% and 23% year over year in Q3 2012, Q2 2012, Q1 2012 and Q4 2011, respectively.
4. The World Bank Report on "Doing Business" ranked Malaysia 12th, moving up 11 spots.
5. Meanwhile, foreign direct investment ( FDI ) growth slowed albeit from a relatively high base last year. On a 12-month rolling sum basis, FDI rose 3% year over year as of June, but this was after an over 20% year over year increase in 2011.
" The biggest contribution to FDI growth came from the U.S. and ASEAN (Association of Southeast Asian Nations) (up 24% year over year), especially Singapore (up 10% year over year), possibly reflecting investment in Iskandar."
Regardless of the election's outcome, the economy will continue to benefit from government spending on infrastructure projects, says Christopher Wolf, CEO and chief investment officer of San Francisco-based Preservation Trust Advisors.
"Inflation is likely to remain under control as fuel and food prices have been relatively stable; services inflation is up but is also manageable," Wolf said in an email.
EWM has gained 10% from its May 2011 low. Wolf sees Tuesday's drop as a "warning" rather than an alarm.
"Investors are getting nervous about the cessation of economic stimulus as elections draw near, similar to gyrations in investor sentiment we've seen in the U.S.," he wrote. "EWM is still up substantially from its low last May."
William Nobrega, founder of Conrad Group in Miami, an emerging markets consulting firm, believes Malaysia will be one of the top performing markets of 2013 as strong economic fundamentals make the ringgit, the country's currency, appreciate against the dollar.
"(The) growing middle class, growing service sector such as financial services, health care and consumer products will counter any slowdown in exports and the rapidly growing medical tourism market," Nobrega wrote in an email.
Follow Trang Ho on Twitter @TrangHoETFs .