Asia Is More Than China

11/19/2008 10:35 am EST

Focus: GLOBAL

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of ChartwellETF.com, thinks Malaysia offers investors a new Asian opportunity.

The State Council, China’s cabinet, recently announced a $586 billion of investment on infrastructure and social welfare over the next two years, although it did not say how much of the spending would be on new projects not already in the budget. The Chinese government has already cut interest rates three times, scrapped quotas for bank lending and unveiled measures to help home buyers and some exporters.

Meanwhile Bulgaria, Hungary, Kazakhstan, and Romania saw their credit ratings downgraded because of the threat of global recession and the drying up of capital flows. Fitch Ratings also revised to negative from stable the long-term foreign currency ratings of South Korea, Mexico, Russia,and South Africa because of fears over the “profound deterioration” in the global outlook and the continuing difficulties in raising money in the capital markets. Chile and Malaysia had their ratings revised down from positive to stable.

Several markets stand out in terms of under and over valuations. In developed markets, Australia and Canada seem overvalued while the Netherlands, Singapore, and Ireland remain undervalued. In emerging markets, Chile appears to be fully valued while Malaysia, Thailand, and Turkey may be due for some upward movement. Russia presents a mixed picture looking cheap on earnings basis but very expensive in terms of cash flow and book value.

My pick of the week is iShares MSCI Malaysia (NYSEArca: EWM). Malaysia has attractive demographics with 32% of its population under the age of 15—more than double the proportion in Japan. Economic growth last year was a respectable 6%, is holding up rather well in 2008 and the country has moved solidly into the middle-income circle of countries with a per capita income of $12,900. All of these favorable trends are finally being recognized by global investors and have also given the country the strength to improve political and economic relations with Singapore.

Malaysia offers many of the attributes of its southern neighbor. Although palm oil and other commodities are an important part of the Malaysian story, investors have begun to recognize that its economy is well diversified with 43% of GDP attributed to the services sector while agriculture represents only 8%.

The MSCI iShares Malaysian exchange traded fund (EWM) is a basket of leading Malaysian companies and has an annual expense ratio of only 0.54%. Financial companies account for 33% of the fund’s exposure, industrial firms are at 18%, and consumer staples and discretionary companies together make up an additional 29%.

I believe the catalyst for growth is the valuation of the Malaysian market, now trading at 1.3 time book value, 6 times cash flow and about 7 times earnings.

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