Another Unassuming Asian Tiger

05/27/2010 12:30 pm EST

Focus: ETFS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Global Stock Investor, says Malaysia has emerged as an economic powerhouse, and its stock market has been one of the strongest this year.

Once a sleepy Southeast Asian backwater, Malaysia has transformed itself into the world’s largest Islamic banking and financial center. Today, Malaysia boasts a population of 27 million—a little larger than Texas—and is the second wealthiest country in all of Southeast Asia, with a per capita Gross Domestic Product (GDP) of $8,209.

Similar to many Asian countries over the past 50 years, Malaysia exerted enormous effort to bootstrap its economy into the modern world. But although Malaysia’s government promotes private enterprise and ownership, economic development is driven by one government plan after another.

Between 1988 and the Asian crisis of 1997, the Malaysian economy grew at a true Asian Tiger rate of 9% per year. This unleashed a fervor of speculation on the Kuala Lumpur Stock Exchange (KLSE), [which] was the most active exchange in the world, with trading volume exceeding even the New York Stock Exchange.

Malaysia’s rapid economic growth and prosperity were best symbolized by the twin Petronas Towers, the headquarters of the national oil giant in Kuala Lumpur and, from 1998 to 2004, the tallest buildings in the world.

The Asian crisis of 1997 changed all that. The KLSE’s composite fell more than 70% in a few short weeks. Malaysian Prime Minister Mahathir Mohamad famously blamed American billionaire George Soros for nearly ruining Malaysia’s economy by speculating against its currency, the Ringgit.

But the government refused economic aid from the International Monetary Fund (IMF), as it viewed acceptance of the IMF’s austere lending conditions as a sign of weakness.

In an effort to get the Malaysian economy back on track, government spending—and budget deficits—soared. [But] the economy recovered faster than its shell-shocked neighbors and by 1999, Malaysian economic growth had rebounded to 5.6%. That said, it took the Kuala Lumpur stock exchange until 2007 to surpass the pre-crisis record of 1,275 it had first reached in 1993.

The Great Recession of 2008 also made its impact felt in Malaysia. The government introduced two stimulus packages in November 2008 and March 2009. As a result, the economy shrank far less than expected—but at the cost of soaring budget deficits.

However, national debt in Malaysia amounts to only 42% of GDP, compared with 187% in Japan or 110% in India. And with 95% of government debt financed domestically, Malaysia’s fiscal position is among the strongest in Asia.

Launched back in1996, the iShares MSCI Malaysia Index (NYSEArca: EWM) has one of the longest histories of any exchange traded fund (ETF). With assets of $643 million, about 32% of the ETF’s assets are concentrated in financials, 19% in industrials, and about 15% in consumer staples. The Malaysian stock market also has been one of the top performers in the world in 2010.

So, buy EWM at market today and place your stop at $10.10. (It closed below $11 Wednesday—Editor.)

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