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EWM: Malaysia ETF Blazes The Emerging Markets Comeback Trail

|Includes: iShares MSCI Malaysia ETF (EWM)

Don't call it a comeback. Well, maybe you should because the once downtrodden iShares MSCI Malaysia ETF (NYSEArca: EWM) is one of this year's most resurgent emerging markets single-country exchange traded funds.

The lone ETF dedicated to Malaysian stocks is up more than 10% year-to-date, a gain that is more than triple that of the MSCI Emerging Markets Index. That after EWM was beset with corruption woes in Malaysia, making the ETF a laggard relative to broader emerging markets benchmarks. For example, EWM trailed the MSCI Emerging Markets Index 450 basis points last year and by nearly 800 basis points in 2014.

Previously, Prime Minister Najib Razak came under scrutiny for $700 million in money transfers through government outlets and state-run firms bearing his name prompting EWM to betray its reputation as a beacon of strength at a time of tumult for emerging markets equities.

For now at least, EWM is again flying high. Rebounding oil prices are helping.

"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," according to a Seeking Alpha analysis of EWM.

Najib has been cutting down on government subsidies to limit fiscal risks in an effort to steer the country toward high-income status and toward more domestic consumption. Consumption is now said account for over half of Malaysia's gross domestic product.

Still, U.S. interest rate policy looms large for Malaysia, as it does for so many developing economies.

"So, we could see that flow of foreign fund greatly influence the performance of Malaysian equity since foreign institution usually hold more than 20% of total market cap of the main benchmark, the Kuala Lumpur Composite Index (KLCI). There are a host of factors that influence the flow of foreign fund into Malaysian equity. But for now, the pace of interest rate hike in US is the biggest concern. Any unexpected change in the pace and timing of rate hike would be unfavorable," adds the Seeking Alpha article.

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