Some Momo for the Malaysia ETF

ETF Trends

The Malaysia exchange traded fund has been strengthening on improving exports, but investors should brace for slower growth ahead.

Malaysia’s economy expanded a better-than-expected 5% in the third quarter year-over-year after rising a revised 4.4% in the second quarter, Bloomberg reports.

Notably, exports increased in the three months through September after falling off in the first six months of the year.

Malaysia, unlike other faltering emerging economies, benefits from a current-account surplus. The surplus widened to $3.1 billion in the third quarter from $810 million in the second quarter.

However, the Bank of Negara Malaysia is holding interest rates at 3% to support growth, anticipating slower domestic demand as the government pulls back on spending.

“We’ve seen some improvement in the export numbers and that’s really a bigger driver of growth,” Euben Paracuelles, an economist at Nomura Holdings Inc., said in the article. In the coming months, “external demand is not going to be that strong. Also, domestic demand seems to be slowing because of fiscal consolidation and the government policy to try and reduce investment spending.”

Prime Minister Najib Razak is reducing fuel and sugar subsidies to cut the budget deficit and bolster the current account after Fitch Ratings lowered Malaysia’s credit outlook to negative.

Nevertheless, the government expects the economy will grow 5% to 5.5% in 2014, up from the projected 4.5% to 5% this year.

“For the Malaysian economy, the gradual recovery in the external sector will support growth,” the central bank said. “Domestic demand from the private sector will remain supportive of economic activity amid the continued consolidation of the public sector. The economy is therefore expected to remain on its steady growth trajectory.”

The iShares MSCI Malaysia ETF (EWM) has gained 3.3% over the past three months and is up 5.5% year-to-date.

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For more information on Malaysia, visit our Malaysia category.

Max Chen contributed to this article.

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