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Malaysia's GDP at 3-Year High: ETFs in Focus

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Malaysia’s Department of Statistics said that the country’s GDP grew 6.2% year over year in the third quarter of 2017 compared with 5.8% in the second quarter and 4.3% in the year-ago quarter. The Malaysian Ringgit increased after the data release.

Malaysia’s central bank, Bank Negara Malaysia, left its Overnight Policy Rate (“OPR”) unchanged at 3.00% in its latest policy meeting, as expected by a Bloomberg survey of 22 economists.

GDP Growth Drivers

In its latest policy meeting, the central bank hinted at changing its stance on monetary policy next year, as economic growth is gaining momentum. Consumer prices in Malaysia increased 4.3% year over year in September compared with 3.7% in August. Therefore, an interest rate hike might be expected in 2018 as the South East Asian economy has registered strong growth and seems to be gaining momentum.

GDP increased as domestic demand as well as exports registered strong growth. Exports grew 11.8% compared with 9.6% in the previous quarter. Moreover, private consumption increased 7.2% sequentially in the quarter.

Manufacturing sector activity grew 7% compared with 6% in the prior quarter. Moreover, service sector activity grew 6.6% compared with 6.3% in the prior quarter.

Gross fixed capital formation grew 6.7% in the quarter as public spending gained momentum. Public spending increased 4.1% year over year compared with a decline of 5% in the prior quarter. “I am particularly delighted that the gross fixed capital formation or investments growth remained steady at 6.7 per cent as private sector investments were sustained and government’s investments rebounded in this quarter,” Abdul Rahman Dahlan, minister in the prime minister's Department said.

Fed Pressure

Per the CME Fed Watch tool, there is a 91.5% chance of a 25 basis point rate hike and 8.5% chance of a 50 basis point rate hike in December. This is expected to weigh on investments in emerging economies and create pressure on various South East Asian economies to adopt a rate hike stance, in sync with the developed world.

Let us now discuss the ETFs providing exposure to Malaysian equities (see all the Asia Pacific ETFs here).

iShares MSCI Malaysia ETF EWM

This fund is a pure play on Malaysia and is appropriate for those looking to gain exposure to this emerging market nation.

EWM has AUM of $446.4 million and charges a fee of 48 basis points a year. From a sector look, Financials, Utilities and Industrials are the top three allocations of the fund, with 31.4%, 14.7% and 14.6% exposure, respectively (as of Nov 17, 2017). From an individual holdings perspective, Public Bank, Tenaga Nasional Bhd and Malayan Banking are the top three holdings of the fund, with 12.5%, 10.7%, and 7.0% allocation, respectively (as of Nov 17, 2017). The fund has returned 15.5% year to date and 9.6% in a year (as of Nov 20, 2017). EWM currently has a Zacks Rank #4 (Sell) with a Medium risk outlook.

We will now compare the performance of EWM with a broad-based South East Asian ETF, ASEA.

Global X Southeast Asia ETF (ASEA - Free Report)

This fund provides broad exposure to the five members of the Association of Southeast Asian Nations, namely Singapore, Indonesia, Malaysia, Thailand and the Philippines. It is appropriate for investors looking for diversified exposure to South East Asia (read: What Lies Ahead for Singapore ETFs?).

ASEA is less popular with AUM of $16.2 million and charges a fee of 65 basis points a year. From a geographical perspective, the fund has 30.1% exposure to Singapore, 22.2% to Malaysia, 22.1% to Thailand, 19.2% to Indonesia and 6.5% to the Philippines (as of Sep 30, 2017).  Financials, Telecommunication Services and Industrials are the top three sectors of the fund, with a 46.2%, 14.8% and 8.3% allocation, respectively (as of Sep 30, 2017). DBS Group Holdings Ltd, Oversea-Chinese Banking Ltd and United Overseas Bank Ltd are the top three holdings of the fund, with an allocation of 8.0%, 7.2% and 6.0%, respectively (as of Nov 20, 2017). The fund has returned 25.9% in a year and 27.9% year to date (as of Nov 20, 2017). ASEA currently has a Zacks Rank #3 (Hold) with a Medium risk outlook (read: Philippines GDP Growth Exceeds Expectations: ETFs in Focus).

Below is a chart comparing the year-to-date performance of the two funds.

Source: Google Finance

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