Why I'm Restarting Stakes in Malaysia and Singapore

I've been waiting a while to get back into my exposure into Signapore and Malaysia - both have been beaten with an ugly stick since I last exited the positions, so these seem like opportunite times to revisit the names for the portfolio. Notably, both are holding up relatively well today in the global selloff. Malaysia has some political risk that has risen of late, so I am a bit less bullish than I was in the past, but I still like it as a commodities play, and Signapore is what the US used to be - a sterling home of finance.

Even when all this mess is cleared up in the US, I expect a long period of underperformance as the US worker/consumer continues to fight a lot of global macro forces that are going to hurt his standard of living. So I continue to look for opportunities overseas.

I've held both these positions in the past, but sold out completely - and I am now beginning starter $10K stakes in both iShares Signapore (EWS) and iShares Malaysia (EWM). It might sound counterintuitive to go to such "emerging markets" in times of crisis, but the malfeasance, corruption, and lack of regulation in the U.S. is as bad or worse in my opinion. So I would not call a low (or negative) growth country that lies in its government statistics, compensates its upper 1% to a massive degree, ignores the middle and lower class, and drives government policies that hurts the masses as any different from a backwater 2nd or 3rd world country. That's simply my opinion, and why I don't see much more risk in investing in these countries than I do in the US.

At least those countries have opportunistic leadership and high growth potential. Sort of like the U.S. 40 years ago. While we are sure to get some sort of back half of the year spike in US equities, we've literally gone nowhere for this entire decade and that's in dollar terms - in gold terms or foreign currency terms we've gone down all decade. The proof is in the pudding and I see nothing in the leadership or consumerism of this country to suggest there is any change coming soon. Frankly, it saddens me but facts are facts - maybe one day we'll look into the collective mirror and demand change but the entrenched interests are simply too strong at this point. Hence, I continue to focus overseas despite the potent risks that also lie there. (nowhere is a perfectly safe environment)

I am not buying either of these country ETFs due to technical reasons - both are in terrible downtrends, but they have corrected severely and we can begin getting interested again. I closed my iShares Singapore position in mid November 07 [Bookkeeping: Closing iShares Singapore (EWS)] writing

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. Technically the index is sitting at its 200 day moving average and is poised for a bounce back, but with other opportunities opening up, and heightened risk in Asia (in my opinion), I will use this cash in other places. 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.

At the time, the ETF was still holding the 200 day moving average in the $13.80s. After a bounce into December, the index has been in free fall and now trades in the $11.70s, or a 15% correction, which is quite severe for a country index. So I am purchasing 900 shares for a 1% fund stake.

As for Malaysia, recent elections have shifted some power away from the current leadership, so we do have some risk there.

• Malaysian stocks tumbled 9.5% after the ruling coalition Barisan Nasional, or National Front, suffered a major setback in the parliamentary election on March 8.
• The National Front won over half of the seats in parliament, but it lost its two-thirds majority for the first time in almost four decades. Prime Minister Abdullah Ahmad Badawi, of the National Front, has been sworn in and has rejected calls that he resign in the wake of the election result.
• "Insomuch as the election can be seen as a repudiation of some of the existing economic policies and structures, there are a lot of investors that would see this as a fairly interesting development," said Andrew Foster, acting chief investment officer at Matthews Asian Funds. "Quite a few investors have been frustrated with the degree of reform in Malaysia," Foster said. "Around my firm, it was hard not to see this as something that could become a positive event."
• Malaysia's main exports are electronic equipment, petroleum and liquefied natural gas, wood products, rubber and palm oil.
• Analysts at UBS said that near-term market sentiment is likely to be negative, "as uncertainty on the political landscape further exacerbates the negative effects of slower global growth on Malaysian GDP and corporate earnings."
• The Malaysian government may defer price hikes on fuel and electricity, and boost spending on social services, such as health care, education, and housing, to regain its popularity, the UBS analysts wrote in a research note.

I sold off my iShares Malaysia ETF in mid January [Bookkeeping: Closing iShares Malaysia] as the index was ramping in the face of a worldwide selloff, led by the US market freefall. With the ETF trading at $13.70 now, and $10.90s now I am able to re-enter this ETF at a 20% discount, 60 days later. Again, a substantial move for a country ETF, but part of this was the election fallout. I am taking a similar stake as the Singapore weighting, 1000 shares for a 1% holding.

Below are some blurbs from an Investors Daily piece on Malaysia in January (of course at the top!) - but again when you read it, and compare the strategic goals of this "backward" "3rd world" country and others like it (say Brazil), you just have to really ask yourself which country is "backward"... frankly I believe the domestic apathy & in fact arrogance in the face of rising global competition needs to end or... well we are already seeing that fallout - going hat in hand to sovereign wealth funds and/or printing money out of thin air just to keep our financial system from bankruptcy. Just imagine a leadership with forward looking goals that actually span longer than 1 election cycle. I know - a pipe dream.

• After 50 years as an independent nation, Malaysia can boast that it is the 19th-largest trading country in the world.
• It has embarked on a "national mission" of becoming a developed nation by 2020. It's taken steps to ease foreign investment guidelines, offer economic incentives and reduce the corporate tax rate to 26% in 2008. It's aiming to hold down its fiscal deficit to 3.2% of GDP to balance long-term growth with sustainability. (what a concept)
• Malaysia's real GDP is projected to grow at a rate of 6% to 6.5% this year with a 6.8% increase in nominal per capita income to $14,206, according to a report from the country's Ministry of Finance. That follows steady GDP growth of 6% in 2007 and 5.9% in 2006.
• The services sector, which accounts for 53% of GDP, grew at a rate of 9% in 2007. It's expected to pick up 8.6% this year. Manufacturing, the second-largest sector, accounts for about 30% of GDP. It's seen rising 3.8% this year, after 3.1% growth in 2007.
• The country has a low unemployment rate of 3.3%, while poverty has been reduced to 6%, according to the Ministry of Finance.

The main risks I see in these countries are the pervasive effects of inflation on the lower and middle class, but I suppose that is going to be a risk in any country at this point in the "World of Shortages" environment I envision.

Long iShares Signapore, iShares Malaysia in fund; no personal position

Comments

[Hutch451]

As a resident of Malaysia, I have to say that the dynamism of the economy is apparent, and the major drag on accelerated growth has been the corruption, cronyism, and lack of transparency of the entrenched government. The recent election results, while generating some anxiety short-term, should ultimately result in increased accountability from the ruling elites, and corresponding reduction in bureaucratic drags on growth. Longer-term, this should have a positive effect on levels of direct foreign investment. While I'm not ready to jump in just yet, as inflation remains a real risk, I'm watching closely and will likely take a position in EWM this year.

[TraderMark]

khutch, thanks for your on the ground local view. Corruption, cronyism, and lack of transparency seems to be a government situation no matter what country.