'Malaysiapore' ETFs Fade with Falling Growth

Includes: EWM, EWS, SGT
by: Carl T. Delfeld

In my Forbes Asia column entitled "Malaysiapore" earlier this year, I likened the Malaysia and Singapore stock markets and exchange-traded funds that track them (see below) to two purring turbine engines, working smoothly in tandem to deliver superior performance. But for the last few months, the Malaysian and Singapore stock markets have run into major turbulence.

The problem is a drop in economic growth.

John Burton of the FT reports that Singapore economic growth slowed in the second quarter to 2.1% from a year ago, providing new evidence that the US slowdown is beginning to impact Asian economies. The city-state downgraded its forecasts for non-oil exports for the year, indicating that it expects them to contract by 2-4% rather than to grow at that pace as it had earlier predicted. Meanwhile, neighboring Malaysia reported that industrial production grew at its slowest pace in 10 months in June

Although palm oil and other commodities are an important part of the Malaysian story, investors have begun to recognize that its economy is well diversified with 43% of GDP attributed to the services sector while agriculture represents only 8%. It also has attractive demographics with 32% of its population under the age of 15 - more than double the proportion in Japan. Economic growth last year was a solid 6% and the country has moved solidly into the middle income circle of countries with a per capita income of $12,900.

Singapore and Malaysian companies have stepped up their investments and activities in each others markets and there is even a Malaysia - Singapore Third Country Business Development Fund co-funded by the two countries. The Fund allows Malaysian and Singaporean enterprises to cooperate and to jointly identify investment and business opportunities in "third countries", outside Malaysia and Singapore.

The Singapore government still predicts full-year growth of 4-5% after the economy expanded by 4.5% in the first half. The economy grew by 7.7% in 2007.

The ETFs that track the Singapore market are the NETS FTSE Singapore Straits Times Index (SGT) and the iShares MSCI Singapore (NYSEARCA:EWS). For Malaysia, it is the iShares MSCI Malaysia (NYSEARCA:EWM).