After An Epic Decline, Is It Time To Invest In Malaysia?

Summary

  • Malaysia’s economy continue to face multiple headwinds in the near future but the direction of its stock market is somewhat predictable hence easing the entry into the market.
  • Target level of 1800 for the main benchmark implies 5% return but could be higher once oil stabilizes. Investors could use MSCI Malaysia ETF to amplify the gain.
  • At current level, long term investment in Malaysia is a sound idea.

Malaysia has been in spotlight recently, but not for good reasons. The news regarding its state owned investment fund company 1 Malaysia Development Berhad (1MDB) is the most recent example. The company, chaired by the prime minister is bleeding money and the prime minister himself is accused to be in a corruption scandal. So, what should investors expect from Malaysia this year?

What You Have To Know

There are several factors, both internal and external that contributed to the decline of Malaysian equity as represented by MSCI Malaysia ETF (NYSEARCA:EWM). The index ETF took a 50% dive since mid 2014 putting Malaysia in true bear market. Keep in mind that these factors are still in play and will determine the market direction in 2016. However, EWM is outperforming regional peers YTD with 10% gain.

Source: Tradingview

1) Co-movement With Oil Price

As a net exporter of oil, sentiment towards Malaysian equity inevitably depends on oil price. The government's coffer is filled mainly by payment from the national oil company, Petronas. With the decline in oil price, the sentiment towards Malaysian equity turned sour. The government was even forced to revise their 2016's budget when the oil price continued to drop in January this year. The earlier version of the budget was made based on the assumption that oil price would be around $48 per barrel.

The co-movement of EWM with price of crude oil is quite stunning. As in the chart below, the pattern of movement of EWM (in blue) is almost identical to that of crude oil (orange).

In fact, since the price of oil started to decline in mid 2014, the rolling 60 days correlation between EWM and US Oil Fund (USO) increased steadily. As such, I think investors could use oil price as the main gauge to identify

This article was written by

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Disclosure: I am/we are long MALAYSIA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not a registered investment advisor. The opinion expressed here is to help me articulate and inspect my investment thesis as well as to receive feedback from public. Investors should do their own due diligence before investing in the market.

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