Investing in Malaysia: Five Reasons To Add This Strong Emerging Market To Your Global Portfolio
by Carl Delfeld, Investment U's Contributing Editor
Tuesday, October 19, 2010: Issue #1369
You ready for the next leg of the "Carl Delfeld World Tour?"
Today, we head north from Singapore to another promising emerging market nation - Malaysia. The Southeast Asian country boasts many attributes similar to Singapore. In fact, the two countries' relationship goes deeper than just being excellent places to send your investment dollars.
Having once had a checkered relationship (Singapore split from Malaysia and gained its independence in 1965), there are now several overlapping traits between the two - a kind of "Malaysiapore," if you will.
With a surface area of just over 127,000 square miles, Malaysia is home to about 24.8 million people and is rich in natural resources. It exports both natural gas and oil and has low inflation and debt.
So let me show you why I see Malaysia as a "middle way" for investors and why you should add this strong emerging market to your global portfolio...
A Fistful of Benefits: Five Reasons Why You Should Invest in Malaysia
What is this "middle way?"
Simply put, instead of the 8% to 9% GDP growth seen in markets like China, Indonesia and India (which is largely driven by low wage rates), Malaysia will grow at a more modest, but more consistent and well-rounded 5% to 6% clip.
Plus, it's a solidly middle-income country, with a per capita income north of $10,000. And more investors have begun to look beyond the headline-grabbing emerging markets towards places like Malaysia instead. Why should you join them? Five reasons...
- Strong Diversification:
Although palm oil, tin, petroleum, copper, iron ore and other commodities are an important part of the Malaysian story, its economy is well diversified. A full 50% of GDP comes from the services sector, with 40% coming from industry and 10% from agriculture.
- Attractive Demographics:
With 32% of Malaysia's population under 15 years of age, 58% of people under 30, and just 8% over 60, the country boasts attractive demographics and a very strong foundation for future growth.
By contrast, just 15% of Japan's population is under the age of 15.
- Forward-Looking Economic Plan:
Malaysian economic growth rolled in at a respectable 6% last year, which has resulted in a solid upward move alongside the middle-income nations.
But Malaysia needs reforms to move to the next level. In particular, it needs to end preferences for some ethnic groups in order to keep talent in the country. In this regard, the government hopes that its New Economic Model (NEM) will increase per capita income to $15,000. To meet this goal, however, the country's GDP will have to grow by an average of 6% per year over the next five years.
- Strong Currency:
With U.S. interest rates at record lows and more money consequently pouring into fast-growing Asian markets, currencies are gaining strength. The Malaysian ringgit is one of them, having recently climbed to a 13-year high.
- Valuations in the Middle:
To some degree, the markets already reflect the changing perception of Malaysian risk and potential return. According to data from Thomson Datastream and Reuters, the overall price-to-earnings ratio for the Malaysian market is 15, while Singapore's is 16.5. Other Asian markets like Indonesia trade for 21 times earnings, while India's Sensex index is trading at a vulnerable-looking all-time high of 24.
But remember how I said earlier that Malaysia and Singapore share a deep relationship and similar traits? The increasing economic integration between the two countries essentially acts as a "dividend" to investors, as it fosters higher economic growth and political stability.
Jump on the "Profit Causeway"
Malaysia and Singapore have agreed to set up a Joint Ministerial Committee, which will oversee economic cooperation in the Iskandar Development Region (IDR) in Johor, Malaysia and will have a causeway linking it to Singapore.
The region spans an area of 850 square miles, which is roughly three times Singapore's size, and smart cards will facilitate the two-way traffic of Malaysians and Singaporeans to the IDR.
It's estimated that on a regular workday, more than 150,000 workers commute over the Johor-Singapore causeway to earn a better living.
So how can you earn some money from this, plus Malaysia's other broad economic and market benefits and the expectation of continued growth?
Investing in Malaysia: Grab a Southeastern Asian Double
The most direct way to gain from this joint project would be to jump on a plane and take a grubstake in Johor real estate.
But since that's not really practical, check out the iShares MSCI Malaysia Index (NYSE: EWM) - a basket of leading Malaysian companies. Breaking the fund down, one-third of the stocks are financials, while consumer staples and discretionary companies make up an additional 29%. Industrial firms account for a further 18% of the portfolio. The fund has an annual expense ratio of only 0.54%.
Essentially, investing in Malaysia is also a back-door strategy to investing in Singapore and capturing the dynamic economic growth within the region. So put both Malaysia and Singapore in your global portfolio and grab the twin emerging market growth of "Malaysiapore."