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Emerging market ETF investing has been quite rocky to start 2013. Funds like (VWO - ETF report) and (EEM - ETF report), 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 - ETF report), has only added about 5% on the year, roughly 1,000 basis points less than (IDX - ETF report) which follows Indonesia, and (THD - ETF report) which tracks the Thai market, and nearly 2,000 basis points less than the Philippines’ (EPHE - ETF report)

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

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