Malaysia ETFs In Focus On Interest Rate Hike

Malaysia’s central bank, Bank Negara Malaysia, hiked its key interest rate for the first time since July 2014. The move was largely expected, as 16 out of 20 economists surveyed by Bloomberg predicted this hike.

The Federal Reserve hiked its interest rate by 25 basis points in the December meeting. Moreover, per the CME Fed Watch tool, markets believe there is a 72.6% chance of a 25 basis point rate hike and a 1.1% chance of a 50 basis point rate hike in the Mar 21, 2018 FOMC meet. This is expected to weigh on investments in emerging economies and create pressure on various South East Asian countries to adopt a rate hike stance, much like the developed world.

Economic Scenario

Bank Negara Malaysia increased the country’s overnight policy rate (OPR) by 25 basis points to 3.25%. "At the current level of the OPR, the stance of monetary policy remains accommodative," the central bank stated.

Consumer prices increased 3.5% year over year in December compared with 3.4% in the prior month, owing to rising fuel and food costs. Inflation woes further added to rate hike pressure.

Coming to economic growth, 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. "With the economy firmly on a steady growth path, the Monetary Policy Committee decided to normalize the degree of monetary accommodation," the central bank said in the statement. "At the same time, the MPC recognizes the need to preemptively ensure that the stance of monetary policy is appropriate to prevent the build-up of risks that could arise from interest rates being too low for a prolonged period of time," the central bank added.

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.

EWM has AUM of $656.3 million and charges a fee of 49 basis points a year. From a sector look, Financials, Utilities and Industrials are the top three allocations of the fund, with 31.4%, 14.2% and 11.0% exposure, respectively (as of Jan 25, 2018). From an individual holdings perspective, Public Bank, Tenaga Nasional Bhd and Malayan Banking are the top three holdings of the fund, with 11.4%, 10.1%, and 7.9% allocation, respectively (as of Jan 25, 2018). The fund has returned 8.4% year to date and 22.9% in a year (as of Jan 26, 2018). EWM has a Zacks Rank #3 (Hold) 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

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 $19.8 million and charges a fee of 65 basis points a year. From a geographical perspective, the fund has 30.7% exposure to Singapore, 22.3% to Thailand, 21.4% to Malaysia, 19.1% to Indonesia and 6.5% to the Philippines (as of Dec 31, 2017). Financials, Telecommunication Services and Consumer Staples are the top three sectors of the fund, with a 47.9%, 13.7% and 7.9% allocation, respectively (as of Dec 31, 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 8.2%, 7.4% and 6.2%, respectively (as of Jan 26, 2018). The fund has returned 34.3% in a year and 5.8% year to date (as of Jan 26, 2018). ASEA has a Zacks Rank #3 with a Medium risk outlook.

Below is a chart comparing the one year performance of the two funds.

Source: Yahoo (NASDAQ:AABA) Finance

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