Malaysia willingly let go of the pearl of Asia, Singapore, in 1965. That of course has led to a clear win for Singapore, but was it a loss for Malaysia?
Staying in the Malay federation would have not given Singapore the independence and fighting spirit necessary to become what they are today. It’s like having a mediocre player on one football team, then after management decides to let him go, he signs a smaller contract with another team and becomes a superstar.
Singapore serves the whole of Asia’s vibrant economy, while before it would have gotten “lost” in the power games that still go on in Malaysia. Plus, Malaysia is a federal monarchy, while Singapore is a republic — clearly the fit was hard to find.
The sultans of the federal Malay states elect the ceremonial monarch, while the general public elects the head of government, the Prime Minister. As we saw in Thailand, ceremonial can be a nebulous term. Clearly, the Malay federal monarch does not have as much power as the Thai king, but he does carry influence.
Malaysia has done a lot to transform itself from a producer of raw materials into an emerging multi-sector economy. The country is considered middle-income by economic standards (GDP per capita is $7,500). For comparison, Singapore is high-income (GDP per capita of $52,000), while India is low-income (GDP per capita of just $1,100).
Keep in mind that less-developed countries have bigger underground economies as a percentage of GDP, which causes the numbers to be underreported somewhat. But even with that in mind, there is lot of room for improvement in both Malaysia and India.
While several governments have tried hard to boost domestic demand and to decrease the dependence on exports, a lot more work needs to be done on that front. Malaysia is an oil and gas exporter, though, where the state oil company Petronas supplies 40% of government revenue. This is an advantage at a time of rising oil prices and a disadvantage at a time of falling prices. This is somewhat similar to Russia, which has the most volatile economy of all BRICs, due to the extreme dependence on the price of oil and other natural resources.
Similar to Singapore and Thailand, we are limited in our choices of ADRs — all available choices trade OTC. But, we do have the Malaysia iShare (NYSE: EWM) and the Malaysia Fund (NYSE: MAY) for investment exposure. Here holding the closed-end fund has been significantly better than holding the ETF; let’s investigate.
The closed-end fund still trades at a significant 9.5% discount, which has somewhat closed from the 16.8% discount to NAV the fund had earlier in the year. This is essentially buying a dollar’s worth of assets for 90.5 cents. There is no guarantee that the discount will close soon, but it is certainly a factor to consider.
This is a well-diversified closed-end fund that gives you broad exposure to the Malaysian economy. Large institutional buyers are better off with the ETF as the NAV issue does not come into play, while individual investors should consider the closed-end fund while it is on sale.
