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Malaysia ETF Could Be Next to Be Impacted by Politics


Investable countries will be holding elections in the coming months.


Investors in the US are not even three weeks removed from Election Day, but it is worth noting other investable countries will be holding elections in the coming months. Malaysia, which is expected to hold general elections in six months, is a prime of country that is easily accessible to US investors.

The Asian nation is also a prime example of one that can easily be affected by domestic politics. To that end, the iShares MSCI Malaysia Index Fund (NYSEARCA:EWM) is one country-specific emerging markets ETF investors will want to keep an eye on in the coming months.

Year-to-date, the iShares MSCI Malaysia Index Fund is up about 10%. That performance puts the ETF well behind comparable rivals such as the iShares MSCI Philippines Investable Market Index Fund (NYSEARCA:EPHE) and the iShares MSCI Thailand Investable Market Index Fund (NYSEARCA:THD). EWM has also lagged the SPDR S&P 500 (NYSEARCA:SPY) by a decent margin.

In its favor, EWM has outperformed those ETFs tracking Indonesia, Southeast Asia's largest economy. Importantly, one reason EWM has likely lagged SPY is beta since EWM qualifies as a low-beta ETF. The ETF's beta against the S&P 500 is just 0.62, according to iShares data.

There is another reason to give EWM strong near-term consideration. Prime Minister Najib Razak, the incumbent, and his Barisan Nasional coalition are facing what is expected to be the tightest election in Malaysian history. Following the country's 2008 elections, Barisan Nasional lost its two-thirds majority in parliament, according to Reuters.

Translation: Malaysia has adopted a familiar tactic seen in the US. That being the opening of government coffers by the party in power to stimulate economic growth in election years. Emerging markets ranging from China to Brazil have announced major infrastructure largesse this year. Malaysia's own infrastructure program has gone largely ignored by foreign investors.

The country's $444 billion Economic Transformation Program is aimed at bolstering domestic demand and lifting personal incomes. Arguably, the program is also designed to keep Razak in power and increase support for the Barisan Nasional coalition.

Investors can reap the rewards of Malaysia's pre-election generosity because the ETF is significantly exposed to the nation's domestic economy. As is the case with many emerging markets ETFs, financial services names loom large in EWM, accounting for over 31% of the ETF's weight. However, industrials and consumer staples combine for nearly 26% of EWM's weight while discretionary names receive an allocation of nearly 10%.

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No positions in stocks mentioned.

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