Emerging market ETF investing has been quite rocky to start
2013. Funds like VWO and EEM,
which dominate the asset base for the emerging world, have seen
returns in the red on a year-to-date basis, although certain
regions have been able to do much better.
One of the top performing markets continues to be Southeast
Asia, as funds targeting nations like the Philippines, Thailand,
and Indonesia are setting the pace. However, investors have noticed
a big exception to this trend so far in 2013; Malaysia (read Time
to Buy Emerging Market ETFs?).
Although the country remains favorably positioned, it has lagged
behind its peers in the region by a pretty wide margin to start the
year. In fact, the main ETF targeting Malaysia,
EWM, has only added about 5% on the year, roughly
1,000 basis points less than IDX which follows
Indonesia, and THD which tracks the Thai market,
and nearly 2,000 basis points less than the Philippines’
EPHE.
What’s wrong with the Malaysia ETF?
The main reason for this underperformance though hasn’t been due
to economic factors but instead due to politics. The country had a
key election, and some believed that the outcome was in doubt.
This is very important as the ruling party, Barisan Nasional,
has been in power over the country since independence, so a loss
would mark a seismic shift in the nation. And, from an investment
perspective, it would also introduce a high level of uncertainty in
the mix, something that investors hate, and especially so in
emerging market nations (see Three Country ETFs Struggling in
2013).
So, while investors have largely scooped up Southeast Asian ETFs
throughout 2013, they have avoided Malaysia and EWM as this
political cloud hung over the market. Fortunately though, there
could be clear skies ahead for the country now that the election is
over and that there was a definitive result to the voting.
Status quo maintained... for the most part
In the recent election, the ruling coalition won a
relatively-close victory, obtaining 133 seats in the 222 seat
parliament, according to the WSJ. This marks roughly 60% of the
total, and far higher than the opposition’s 89 seat haul.
Still, the results weren’t a ‘total victory’ by any means and
some questions are likely to hang over the market. First, the
winning coalition has less than two-thirds of the seats, so it
could be a bit more difficult to pursue their legislative
agenda.
Furthermore, there are also some worries about fraud, with the
opposition broadly protesting the results in several districts. It
remains to be seen if this bubbles up into a new issue, but as of
now, it appears that many are shrugging off these concerns.
Impact on Malaysia ETF
Shares of EWM soared after the election results were known, with
the ETF jumping by over 6% on the day and going to a new all-time
high. Volume was also elevated as well, as the number of shares
that changed hands easily exceeded the normal daily level by the
midpoint in the day’s session (see Malaysia ETF: The Perfect
Emerging Market Fund?).
Clearly, investors like the fact that a huge level of
uncertainty has been removed from this market, and that the country
can finally rebound like its peers in the region. It also shows
that investors aren’t putting too much behind the fears of recounts
or electoral protests, and that smooth sailing could be ahead for
the country.
Bottom Line
Now that the election is behind Malaysia, it could be time to
take a closer look at EWM. Currently, we have a Zacks ETF Rank of 1
or ‘Strong Buy’ on the fund, so we believe that the nation has a
pretty good outlook in the near term (read Can Anything Stop These
Southeast Asia ETFs?).
So, for investors seeking an emerging market play in the region
that hasn’t surged so far in 2013, this could be an intriguing
pick. It has plenty of room to catch up to its counterparts in the
region, and now that a big portion of the worries hanging over the
country are gone, it may be poised to surge higher in the weeks and
months ahead.
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Author is long VWO, EWM, IDX
ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS PH IM (EPHE): ETF Research Reports
ISHARS-MALAYSIA (EWM): ETF Research Reports
MKT VEC-INDONES (IDX): ETF Research Reports
ISHRS-MSCI THAI (THD): ETF Research Reports
VANGD-FTSE EM (VWO): ETF Research Reports
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