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Like many sectors of the Malaysian economy, the country's transport industry has experienced a decline in activity due to the global recession. Though there are some signs that Malaysia's transporters are again moving in the right direction, other signals suggest a full recovery is still some time off.

There was mixed news for the transport sector in data released by the Department of Statistics on August 26, which showed that while still in recession, the rate of negative growth in the Malaysian economy is slowing.

Having declined by 6.2% in the first quarter of 2009, GDP contracted by 3.9% in the second, the curve being smoothed out due to increased public spending and positive growth in private consumption. This should be encouraging for the transport sector, which has seen productivity fall as demand for moving cargo locally and internationally plunged.

Less equivocal data indicating an improvement in the sector came in early August, with statistics showing a sharp rise in cargo-handling activity at Malaysia's ports.

Movements of containers at the country's 10 major ports rose by 10.2% in the second quarter compared to the first three months of the year, with 3.79m twenty-foot equivalent units (TEUs) being handled against 3.44m TEUs in the first quarter.

Of the second-quarter figure, 2.49m TEUs was trans-shipment traffic, up 11.7% on the previous quarter; 670,718 TEUs carried exports, a rise of 10.2%; and the remaining 640,469 TEUs containing imports, a 4.4% increase.

While a solid performance, the six-month total of container movements was still down 7.7% on the January-to-July figure for 2008, though this decrease in activity is far less than that recorded by some of Malaysia's near neighbours, with throughput at ports in Thailand and the Philippines down by 35% and 20.6%, respectively.

Another hint that the transport sector is on the road to recovery was a jump in commercial vehicle sales, which hit a six-month high in July, with 4800 units rolling off the lots, almost 20% higher than the previous month.

Exhibiting robust health is national carrier Malaysia Airlines (MAS), which posted its best-ever quarterly net profit in the April-to-June term, bouncing back from losses of $193.7m in the first quarter and $244m in the second. Key to the airline's return to form was an aggressive advertising campaign, cost reductions, cutting fares on off-peak flights to increase passenger take up, and reversing losses on fuel hedging.

It is not just MAS that benefited from the steep drop in fuel prices, one of the transport sector's highest costs. In the 12 months to the end of July, transport charges had fallen by 19.9%, according to figures released by the Department of Statistics in mid-August, though this could reverse as the price of fuel has once again started to climb. Month on month, transport charges rose by 0.1% in July, in line with the overall movement of the consumer price index.

If, as is widely predicted, the Malaysian economy continues its push out of recession in the third quarter and returns to positive growth in the fourth, the upturn should carry the transport sector in its wake, especially if the pick up in domestic demand is matched by that in the country's export markets.

Our expectation is that this would confirm that the iShares MSCI Malaysia Index Fund (NYSE:EWM) is set to add to its successful growth over the last 6 months. The Malaysia ETF has not exploded as some of its emerging market counterparts, but has shown steady & sustained growth, with very little volatility. A solid buy in torrid times.

Source: Transportation Sector Recovery Indicates Growth for Malaysia ETF