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.