How Bullish Foreign Investors View The Malaysia Story

Malaysia has not been appearing in most international investors' radar for the longest time. Lately the funds flow into emerging markets have been picking up steam, and its refreshing to read how international investors view the Malaysian story. My comments in brackets and in red.




http://seekingalpha.com/article/231003-five-reasons-to-add-malaysia-to-your-global-portfolio


by Carl Delfeld

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. (Well, Carl, actually if you look at the working population, the figure may be around 12m ... but we have a lot of legal and illegal foreign workers, maybe to the tune of 3m collectively ... so, at least 25% of the workforce can be considered as "low cost and outsourced" in a way). 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 (ya dude, stress the middle-income), 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. (I probably won't agree with the word "strong").
  

• 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 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. (One of the new ways of looking at the ringgit is that its a great proxy play on the Chinese yuan. Since its difficult to get direct exposure to yuan bonds or yuan deposits, this has certainly perked demand for ringgit bonds).
  

• 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. (I think Carl may have a point here. I would call it "Singaporise the Malaysian economy" - the KTM thing solved paves the way for the speed train from KL-Singapore, I do think the economic benefits will outweigh the impact of building the North South Highway. The Iskandar region is still too slow in progress but its there with its inherent potential, and a lot depends on Singapore and not Middle East investors. Almost everyone was shocked at the spectacular success of Sentosa, esp in property. To me it looks like a repeat of the HK-Shenzhen / Macau transformation, Shenzhen / Macau being likened to Sentosa. Being "successful" will means the border and economic activity will be pushed further .... the next 2 years should see spillover activity into the Iskandar region, much like what has happened to Zhuhai region following Shenzhen / Macau).
  

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. (Err, Carl, yes and no, do check out the weather patterns for various regions as Johor is highly prone to flooding in many areas).

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.”

p/s I hope this catches on, remember that you heard it here first: "to Singaporise the Malaysian economy" ; )