Macro Tsimmis

intelligently hedged investment

BUY MSCI Malaysia Index (EWM)

Posted by intelledgement on Tue, 02 Jan 07

Good things can come in small packages, but the thing is, Malaysia is not all that small. Well, true, at 330 thousand square kilometers, it is only one-twentieth the size of Australia…but packed into that small space is a population 20% larger than Australia’s, twice as much natural gas reserves, almost as much oil reserves, and one of the planet’s best strand of productive woodlands, with rubber and palm oil among the country’s many significant wood-related exports.

But the real story in Malaysia is the population. Young, 88% literate, and heterogeneous (only 50% Malay, only 60% Muslim), the people of Malaysia, guided by a series of good governments, have in the past three decades transformed their country from a semi-exploited exporter of raw materials into a vibrant, growing economic force in electronics (which is now the cardinal export) and financial services. With an unemployment rate (3.5%) smaller than China’s and a GDP growth rate (5.9%) nearly double Brazil’s—per capita GDP ($12,900) far outstrips that of Brazil, China, or India, and their 5% population-below-poverty-line handily beats the USA—Malaysia is consistently ringing up impressive numbers.

In addition, the country has a positive current accounts balance, more gold/Fex reserves than the USA, Brazil, or Australia, and are net exporters of oil and natural gas.

Malaysia would be hurt by a significant slowdown in the USA economy. Fully 20% of all exports go to the USA; the next largest destination is Singapore (who seceded from Malaysia back in 1965 after a short two-year marriage). But trade with China is growing; this should be less of a threat as the Chinese middle class’s appetite for electronics grows. The government unlinked the ringgit from the dollar in 2005—another nail in the dollar’s coffin—and the Malay currency appreciated 6% against the USA’s…another plus for a USA investor in Malysia.

The instrument of our investment in Malaysia is the iShares MSCI Malaysia Index (EWM). This exchange-traded fund is heavily weighted towards financial services (33%) and industrials (18%), aptly reflecting the sweet spots of the Malaysian economy. There is also significant representation for consumer discretionary (15%), consumer staples (14%), and utilities (11%), reflecting the high income levels of the populace. The P/E ratio is running around 13 and the yield is 2%. EWM is moderately traded (2.9MM shares/day).

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