Malaysian Tiger

| About: iShares MSCI (EWM)

Summary

Investing successfully means going against the crowd.

Malaysia offers good investment opportunities.

Real estate sector boom is fuelling economic growth.

Click to enlarge

Looking through the news and analysis on Malaysia, one could be forgiven for thinking that it is only the 1MDB scandal that is relevant to investors right now.

One of my unscientific ways of getting a feel for public sentiment and applying it to my market thesis is to conduct a Google search on a keyword like Malaysia and then browse through the first five or ten pages to see what has been written about that company, nation, or organization.

I do this because I understand that the majority of people form their views by what they read, especially from online sources. It is also true that the majority of people will never stop to check the accuracy of what is being asserted online, and as a result, erroneous information spreads and becomes the prevailing truth.

This is not because it is factually accurate, but it has been repeated so many times that everyone assumes that it is correct, but it is not correct; repetition and public opinion do not turn an error into truth or fact.

This type of unscientific but powerful analysis works even better when the actual fact is the complete opposite of what the masses believe, and in the investment world, this provides astute investors with a powerful tool that can used to achieve outsized returns.

Markets always move on facts, but the process of getting the crowd to change direction is the challenging part, and it can also be an expensive process. This is why one must always trade with options as they give investors the opportunity and time to speculate on market pullbacks, consolidation and extension in a manner that can almost be risk free if the spreads are constructed appropriately.

Malaysia is one market where this is true because the market is significantly undervaluing it as a result of what it perceives as political turmoil in the country.

Nevertheless, I do not believe that even a Najib Razak impeachment will be enough to derail what has been very solid and impressive economic growth in Malaysia.

Domestic consumption continues to grow steadily and acts as a buffer against what many believe will be a slowdown in its export sector, but, as of now, both consumer spending and exports continue to grow.

Click to enlarge

In addition to these, the manufacturing sector has been subdued, but continues to post increasing gains.

This is all the more impressive especially when considering that Malaysia is having a medium-term inflation slump that has pushed its central bank to reduce interest rate, and when one considers the trend from the graph below, it is increasingly apparent that we will see lower interest rates going forward especially as food and energy inflation remains low.

Click to enlarge

In terms of the Malaysian ringgit, lower growth is forecasted going forward, which is a welcome exception to the average for emerging markets where speculative currency inflows have resulted in inflated currency rates.

Click to enlarge

The long-term resistance point for the Malaysian ringgit/USD has been 1.4, which it last reached in 1998, and at the start of this year, it nearly hit that point again, but has continued to pull back.

Click to enlarge

The combination of falling interest rates and a falling currency will give a significant boost to the stock market and also reduce the economic risk of such an investment.

What we can see from the graph above is that the stock market is very sensitive in that when we see high interest rates, the economic performance of the companies dips and vice versa. The increase of interest rates earlier this year arrested the upwards march of the stock market, but now we are seeing a gradual uptick in the stock market as interest rates fall.

This is why I am very bullish on EWM, the Malaysian-focused ETF. While it has fallen over the medium term primarily due to the fall in commodities prices, it has gradually picked up this year and is now on an uptrend.

As to be expected from Malaysia, it does have a bias towards banking stocks, but overall, it is still a diversified ETF with holdings in healthcare, manufacturing and industrials and also consumer products.

I believe that the weak link in Malaysia is the manufacturing sector, which has almost gone into negative figures. I believe that this has been because of slowing demand from China, but at the same time, we are seeing high capacity production of 82% and very low inventories, which suggests that domestic consumer demand is rising as the chart above showed.

It is also interesting to note that the construction sector and cement production continue to grow significantly, and one of the reason for this is that while FATCA has restricted the range of investments American citizens can make abroad, real estate is exempt as a non-financial asset and American citizens can buy foreign real estate without having to fulfil the requirements of FATCA.

Malaysia has made it relatively easy for foreigners to buy and settle in its nation if necessary, and when one couples this with the relatively low prices of Malaysian real estate, stable yields and growing demand, then it becomes apparent why this is increasingly becoming a top destination for American citizens to invest their money away from the prying eyes of Uncle Sam.

For those who are interested in a pure Malaysian real estate play, there are a number of locally-listed REITs in Malaysia that gives exposure to the various ranges of Malaysian real estate opportunities.

As these real estate opportunities grow not just in Malaysia, but throughout South East Asia, it will have spillover effects into other parts of the economy and thus accelerate growth throughout the region.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.