Leaving iShares Malaysia as Singapore and Hong Kong Telegraph Decline

I am closing my position in iShares Malaysia (EWM). I've held this position since day one of the fund - it has never been a huge position since its a country index, but I really like this country as a "natural resources" play on Asian growth. I booked about $2700 in gains which is not a huge amount, but contributed about 0.25% to the fund's return over time.

In the fall I owned multiple Asian ETFs, Hong Kong (EWH) as a proxy on China, Singapore (EWS) as a play on the emerging financial capital of Asia, Malaysia, and the closed end India Fund (IFN).In late October as US investors ran up Chinese stocks like mad without any sense of valuation (and Shanghai also ramped with no sense - those were the days of PetroChina achieving $1 trillion of market cap), I was very nervous about the speculation. A week after the Shanghai IPO of Petrochina, in mid November I exited out of iShares Hong Kong. Then a week later I sold iShares Singapore. At the time I wrote:

While I like Singapore for the long run, its a finance based economy so could be open to some slowdown if we get a global/Asian slowdown. Contrast this to Malaysia (I still am keeping my iShares Malaysia (EWM)) which is more of an export country with natural resources - sort of a mini Brazil.While Asia markets have corrected along with US markets, the full effect of the US slowdown on their growth probably won't be recognized until 2008. So this is not a short term call, as this index is at a good support area and probably will bounce, but this is more of a long term outlook.

I think that time I called for in November is now fast approaching.The charts show, selling the Hong Kong and Singapore ETFs was prudent to do in mid November (and you can see the extreme spikes in October as the world was awash in Chinese Kool Aid).While keeping Malaysia also worked out well (better than I anticipated in fact)

But I don't want to press my bets. A lot of "myths" have been busted of late. A couple of myths still left to be destroyed are "it is safe to buy Chinese stocks until the Olympics" and "emerging markets are safe havens". The latter is especially shocking - if you said that five years ago, you'd be laughed out of a room. Now it's conventional wisdom. This ties into another myth - that if 3/4 of the world's GDP is heading to contraction (US, UK, Western Europe, Japan) - especially consumer lead... that somehow the small sliver of middle class in India, China, Brazil will offset that. Hardly. So this leaves these markets a lot of room to fall.

I still have kept my India positions, but unlike the fall when I was very interested in this market since it was being ignored as US investors chased into any Chinese stock and ignored India [China v India the past 2 Months], I have pulled back my Indian exposure as well. Much like Malaysia, India has bucked the trend and its index was at all time highs in past few weeks. While I still like all these markets for 2010+ and believe this area of the world *IS* (and will continue to be) the next great growth engine over the coming decade(s), the very rich valuations more than support this view and once the myth of "decoupling" between emerging markets from developed markets is broken, we could be subject to a large sell off. 

I don't know when this myth is busted but I believe 2008 will be a year one can make a lot of money with Ultrashort Emerging Markets (EEV) along with Ultrashort Xinghau China 25 (FXP), both introduced in October. [New Ultrashorts Being Introduced for Foreign Markets]. That said, both are extremely volatile with huge daily swings, and I cut back exposure to these two names (after some nice returns the past 2-3 weeks) last week expecting some sort of bounce in the markets... (hello? bounce? where are you?)

So I am not participating much in recent huge moves. Much like the US stock market this fall and early winter, I expect a thrashing type of action to take place in these foreign emerging market indexes as "denial" battles with "hope". Just as we denied the slowdown and thought the Fed would fix everything (remember that powerful move off that first Fed cuts post August). So it won't be straight down but Singapore and Hong Kong already seem to be telegraphing what the rest of Asia might be facing.

So I am cutting Malaysia here (also will help raise cash) and as stated over the past two weeks have cut back Indian exposure to its lowest in a long time. When those markets start pricing in US recession and W Europe slowdown, I'll get more interested. As I've stated before, specific to Malaysia think of it as a mini Brazil - it will be buffeted to a large degree due to its commodity based economy, but in panic people don't differentiate - they just sell everything off (we've seen this lately in the US market), so I expect a sell off there during the next year just like the others.

Disclosure: Long Ultrashort Xinghau China 25, Ultrashort Emerging Markets in fund; long Ultrashort Emerging Markets in personal account