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Malaysia ETF: Policy Shifts Could be Looming

This article was originally published on ETFTrends.com.

The iShares MSCI Malaysia ETF (EWM) experienced some volatility last week, plunging immediately following Prime Minister Mahathir Mohamad's surprise win in a recent election there. The lone US-listed exchange traded fund dedicated to Malaysian equities would rebound later in the week, but still finished the week with a loss of over 5%.

Some ratings agencies are forecasting policy changes in the wake of the surprise election result.

“The surprise victory of the opposition Pakatan Harapan (PH) coalition in Malaysia's general elections held on 9 May means a much higher likelihood of fiscal and economic policy change,” says Fitch Ratings. “The PH won 113 of 222 parliamentary seats, resulting in Malaysia's first electoral transfer of power since independence in 1957.”

What's Next for Malaysia ETF

Mahathir, who previously served as prime minister for 22 years ending in 2003, said he’s seeking an active stock market and an increased overall market capitalization, adding there shouldn’t be any need to devalue the Malaysian ringgit currency. Even with Friday's modest recovery, EWM closed last week below its 200-day moving average.

“Fitch affirmed Malaysia's 'A-' rating with a Stable Outlook on 28 March, noting that the election result was unlikely to lead to significant economic policy shift,” said the ratings agency. “The extent to which the new government's agenda will shift major policy is uncertain, but the PH victory and its policy platform indicate a much greater potential for change. In the meantime, Fitch will monitor the new government's policy agenda as it evolves.”

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EWM, home to $564.71 million in assets under management, holds 47 stocks. The ETF, which has a trailing 12-month dividend yield of 5.17%, allocates almost 37% of its weight to financial services names. The utilities and consumer staples sectors combine for almost 28% of the fund's weight.

“Other notable PH platform policies include a review of government contingent liabilities and a Royal Commission of Inquiry to investigate recent corruption scandals. Reviewing contingent liabilities could limit the build-up of risks to broader public finances over the long term, though at the expense of creating some headwinds for domestic demand and growth. An inquiry into scandals could improve governance indicators over time, mitigating a key rating constraint for Malaysia,” according to Fitch.

For more information on the developing economies, visit our emerging markets category.

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