Malaysia Inflation At Record High: ETF In Focus

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Includes: ASEA, EWM
by: Zacks Funds

The Malaysian central bank expects a challenging year in terms of monetary policies as inflation is at record levels. Malaysian Consumer Prices in February rose at the fastest pace in over eight years. This added to the troubles of the central bank as it fights to keep its interest rates low to support economic growth.

The central bank tightened its GDP growth forecasts. Bank Negara Malaysia said in its annual report that GDP is forecast to grow in the range of 4.3%-4.8% this year, compared with its previous forecast of 4-5% growth for 2017. The CPI grew 4.5% year over year, higher than the Bloomberg median estimate of 3.9%. Prices rose 1.3% month on month. Inflation is expected to average 3%-4% in the year compared with 2.1% last year.

Bank Negara Malaysia has left borrowing costs unchanged since July 2016, when an unexpected interest rate cut was witnessed. Despite a recovery in exports, global uncertainty is weighing on the economy. Higher uncertainty in the U.S. with respect to President Trump's protectionist agenda is complicating Malaysian monetary policy outlook.

The country's current account surplus is expected to fall to $3.9 billion this year. The fiscal deficit is estimated to fall 0.1% to 3% of GDP this year.

The Malaysian economy has a mixed outlook. Let's take a look at the Malaysia-focused ETF:

iShares MSCI Malaysia ETF (NYSEARCA:EWM)

This fund is a pure play on Malaysia and is appropriate for investors looking to gain exposure to this emerging market nation.

EWM has AUM of $332 million and charges a fee of 48 basis points a year. Financials, Industrials, and Utilities are the top three sectors of the fund and comprise almost 60% of the fund holdings. The fund bears concentration risk as more than 55% is allocated to the top 10 holdings. It trades in an average volume of 576,000 shares. Though the fund lost 10.01% in the past one year, it has gained 9.26% in the year-to-date time frame (as of March 23, 2017). EWM currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

We will now compare the performance of EWM with a broad-based South East Asian ETF, ASEA.

Global X Southeast Asia ETF (NYSEARCA:ASEA)

This fund provides broad exposure to the five members of the Association of Southeast Asian Nations, Singapore, Indonesia, Malaysia, Thailand, and the Philippines. It is appropriate for investors looking for a diversified exposure to South East Asia.

ASEA is less popular with AUM of $11.2 million and charges a fee of 48 basis points a year. Financials, Telecom, and Industrials are the top three sectors of the fund and comprise almost 70% of the fund's holdings. It bears concentration risk as almost 50% is allocated to the top 10 holdings. It trades in an average volume of 3600 shares. The fund gained 6.54% in the past one year and gained 9.54% in the year-to-date time frame (as of March 23, 2017). ASEA currently has a Zacks Rank #3 (Hold) with a Medium risk outlook.

Source: Yahoo Finance

Though EWM lost a little over 10% in the past one year, it has bounced back in 2017, with a 9.26% gain. The broad South East Asian ETF has a similar return so far this year, at a little over 9.5%. The chart shows that in the year-to-date time frame, performance of both the funds has somewhat been similar. However, the gains should not be taken at face value. Due to growing global uncertainty, we believe it is best to remain on the sidelines for now.

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