Is the Malaysian Stock Market Due to Fall?

An ETF that has interested me for quite a while has been the iShares MSCI Malaysia Index Fund (EWM). Year to date, the ETF has grown by 0.71%, considerably higher than the S&P 500’s -6.5% drop so far. Seem strange? Well there are two explanations for this that, to me, don’t make too much sense.

One is the belief that Asian economies have decoupled and will no longer be heavily affected by the U.S. economy. If the U.S. hit a recession, China and India’s continued growth would fill the void in demand and continue to stimulate growth. With three decades of double-digit growth in Chinese GDP that has no sign of abating and with India improving its factors for growth, the two big Asian economies should be able to survive a U.S. recession and drive growth in the region.

Yet according to history, every time the US has had a recession, the GDP of Asian countries have always declined. As noted below, all Asian stock indexes have also taken a hit far worse than that of the S&P 500.

Another reason is Malaysia’s decent growth prospects, with 6% GDP growth expected in 2007 and 2008. What isn’t mentioned is that a lot of this growth is driven through exports. In 2007, Malaysia had estimated annual exports of $169.9 billion or 47% of GDP. Its two main trading partners together, Singapore and the U.S., account for 35% of this number and both aren’t experiencing the best economic situations. Singapore recently experienced a surprise -1.2% contraction in its 4Q GDP and the U.S. may very well have experienced the same when preliminary GDP numbers come out this Thursday. Malaysian 4Q GDP numbers coming out today will shed far more light on the picture but considering Malaysia’s export-oriented economy, it wouldn’t be too surprising for these numbers to be adjusted down.

Looking at EWM, one might be inclined to believe that Malaysia has one of the most resilient economies in the world. I, for one, do not and am extremely bearish on this ETF.

Disclosure: none

Comments

[Ira Pfeifer]

Did you look at EWM's holdings before posting this? According to Yahoo Finance, it's only 9.12% Consumer Goods. The Malaysian economy as a whole may be reliant on export goods for its GDP, but this ETF has much heavier weightings in Financial Services (28.02%) and Industrial Materials (14.86%). Between those two, there may still be reasons to sell, with banks facing the credit crunch and industrial materials eating the spiking commodity costs, but I think your logic on exports is flawed.

[Jason Liu]

Due to EWM's holdings, it hasn't dropped as much as the KLSE. However if exports are dropping, as they have already, the economy will decline and this will in turn affect domestic demand and cause the price of EWM to drop. Just as everything in America drops with the threat of a recession, the same thing will happen in Malaysia.

[The Rock]

Hmm...1/3 of the Malaysian Economy is doing extremely well - plantation and petroleum. The latest Q4 -2007 GDP no proves that. Yes the exports will slow but most of these are small caps and MNCs. Many huge pump priming contracts have been dished out quietly before the election in the last few months to satisfy the business community who are pro-government. These are not in the news yet but those in the industries & government know these.

There will be winners and losers. Thus it is difficult to say how the ETF will perform.

Malaysian market has now enter a phase where stock selection - bottom up approach is crucial. No longer top down - anything moves up. The bull is dead or maybe sleeping. Fundamental analysis becomes important again.

Cheers from KL.

[Ming]

Its probably hard to call a definite short on KLSE - EWM, but you should certainly sell off when you think there is around temporary peaks .. these peaks you have to call on your own (unfortunately).

[zawy]

Everyone above is being ridiculous. Malaysia will outperform if not stun in the next 10 years. It's a net-exporter of oil, food, and steel. Inflation is low. GDP growth is 7%. PE is 15. This beats the U.S. markets hands-down on all counts. Only Brazil can compare, except it has lower cost labor, more high tech companies are moving operations there, and it's in China/India's back yard. It's one of the most trusted markets in the world.