Monday, July 15, 2013

Malaysia: New Belle of the Ball

Malaysia: New Belle of the Ball
With other emerging markets looking ugly, the country sports new appeal for stock-market investors

Emerging Markets

It wasn't so long ago that investors compared choosing among developed nations to picking the prettiest contender in an ugly contest. These days, the same could be said of emerging markets.

When the International Monetary Fund cut its forecast for emerging-market growth by 0.3 percentage point last week, it confirmed what many investors were thinking: Emerging markets don't feel like the safest bet just now. China's economy is slowing—the IMF cut its forecast to 7.8%, down from 8.1%. Brazil's central bank is hiking interest rates as it attempts to slow the rising prices that have led to protests, never mind its stagnating economy. And Russia is, well, Russia.

Smaller countries don't look much better. The stock markets of Latin American commodity producers Peru and Chile have dropped 30% and 21%, respectively, as investors bet a slowing China would need far less iron and copper. Indonesia's central bank raised interest rates—again—on Thursday, which can slow returns, while the Philippines still looks expensive. And Turkey is investigating what role financial institutions might have played in recent protests, not necessarily the best way to rebuild confidence after a 15% stock-market decline.

THAT LEAVES MALAYSIA. No one's going to mistake it for the most dynamic emerging market. Its economy grew 4.1% in the first quarter—nothing to complain about, but far lower than Indonesia's 6.2% or the Philippines' 7.8%. Yet its stock market has done something that its Southeast Asian neighbors haven't over the past three months—stay in positive territory. The iShares MSCI Malaysia Index exchange-traded fund (ticker: EWM) gained 2.3% in that stretch, as ETFs dedicated to Indonesia, the Philippines, and Thailand slid more than 10%.

Why the strength? Some of it can be chalked up to the fact that Malaysia sat out the rally that put the Philippines and Thailand among 2012's best performers. The iShares MSCI Malaysia ETF returned 15% last year (with reinvested dividends), while the iShares MSCI Philippines Investable Market Index (EPHE) returned more than three times that.

Investors had also been concerned that Malaysia's ruling party would lose elections this year, derailing heavily anticipated economic reforms. When Prime Minister Najib Razak's Barisan Nasional party squeaked out a victory in May, "it was the result the market was hoping for," says Gustavo Galindo, an emerging-market portfolio manager at Russell Investments.

The election helped boost shares of companies that would benefit from the ruling party's policies. Utility Tenaga Nasional (5347.Malaysia) has jumped 25% this year, as the government plans to let it include the cost of raw materials in what it charges consumers in 2014, says Michael Ade, an emerging-markets portfolio manager at RS Investments. He sees more upside for the stock, which he says remains cheap at just 11.1 times the past 12 months' earnings.

There's little reason to think Malaysia's stock market shouldn't keep rising. Neil Leeson, an ETF strategist at Ned Davis Research, notes that at the height of the selling, 45% of the stocks in the iShares MSCI Malaysia ETF were making 30-day lows. Now, some 20% are making 30-day highs. Ned Davis's multi-factor trend model, a composite of technical indicators, is at a level where stocks have, on average gained nearly 17% during the next 12 months.

Upshot: Malaysia's days as an ugly duckling might be coming to an end.

Publish date: 13/07/13

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Warren E. Buffett(沃伦•巴菲特)
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