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Malaysia ETF in Focus on Ringgit Fall

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Malaysia's currency has been falling headlong since Donald Trump's surprise win in the U.S. presidential election on November 8. Even the Malaysian central bank - Bank Negara Malaysia’s effort to arrest the fall has failed. For the month so far, greenback has climbed as much as 6.5% against the Malaysian currency.  Ringgit has almost touched the lows last seen during the Asian financial crisis in 1997.

The U.S. president-elect plans to increase fiscal stimulus, which is likely to push long-term interest rates higher. In fact, the Fed is now expected to raise interest rates more quickly than previously expected. Data from CME Group suggest a 93.5% chance of a rate increase in the December policy meeting. The chances of the first interest-rate increase in the year are high, considering that inflation has accelerated in the recent months and job market data is encouraging (read: U.S. Job Growth Momentum Continues: ETFs to Buy).

This in turn has led the U.S. dollar to gain against most global currencies. The greenback has been downbeat for the most part of this year owing to mixed economic date and low interest rates prevailing in the country. However, Trump’s plan of more fiscal stimulus, low taxes, an easier regulatory environment and domestic job creation bolstered the currency to a 13-year high (read: ETF Winners & Losers as Dollar Hits 13-Year High).

Meanwhile, 10-year U.S. Treasury rates are also on an upswing. Bank of America Merrill Lynch estimates that 10-year Treasuries will yield 2.65% percent by the end of 2017, about 34 basis points higher than the current level of 2.36% (recorded on November 23, 2016). Rising yield of U.S. Treasury has increased their attractiveness compared to bonds issued by emerging markets like Malaysia.
The Malaysian currency has been one of the hard-hit victims of rising yields in the U.S. Bank Negara Malaysia has confirmed that it intervened in currency markets to defend the ringgit. However, the currency continued to slide despite these efforts.

As of now, analysts are divided if it’s the beginning or end of the ringgit woes. As per data from HSBC, foreigners have ownership of more than 50% of Malaysia’s government bond market. Some analysts are concerned about high foreign ownership. However, it is to be noted that the country is still single-A rated by major credit rating agencies including Fitch, S&P and Moody's. Meanwhile, the country’s current account position, fiscal balance and monetary policy look well managed.

Meanwhile, oil has been on the rise on renewed hopes of a cut in production by the Organization of the Petroleum Exporting Countries (OPEC) and reports of falling U.S. shale production. If some positive development comes out of the OPEC meeting, it could benefit Malaysia significantly as it is a net exporter of crude oil (read: Oil ETFs Jump on Renewed Hopes of OPEC Cut).

The pure-play Malaysia ETF - iShares MSCI Malaysia ETF (EWM - Free Report) lost about 9.3% in the last one month (as of November 23, 2016). The product provides exposure to Malaysian equities and has an asset base of $263.3 million. The fund trades in good volumes of around 513,000 shares on an average, while charging 49 basis points as fees.

The fund provides concentrated exposure to a basket of 45 stocks. The top two holdings together occupy more than one-fifth of the total fund assets. Sector-wise, Financials dominates the product having 27.9% of the total fund exposure. Apart from this, Utilities (16.3%) and Industrials (14.8%) also have double-digit exposure. EWM has a Zacks ETF Rank #3 or “Hold” rating with a Medium risk outlook (read: 4 EM ETFs that are Still in Green this Year).

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