Malaysia ETF Muddles Its Way Through Political Volatility

The iShares MSCI Malaysia ETF EWM is experiencing an eventful May. EWM, the lone U.S.-listed exchange traded fund tracking Malaysian stocks, sank after a surprise election result ended the 61-year reign of Prime Minister Najib Razak’s ruling coalition.

Razak was a controversial figure and often accused of being corrupt and worse. Mahathir Mohamad, 92, who previously served as Malaysia’s leader for over two decades, came out of retirement to defeat Razak. It is the first time since 1957 an opposition coalition has held power in the southeast Asian nation.

What Happened

Mahathir joined forces with the Pakatan Harapan coalition. Markets adjusted to the election, with Malaysian stocks and EWM rallying, but much of those gains have since been given back.

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

EWM fell below its 200-day moving average during the post-election decline and is now back below that key technical indicator.

Why It's Important

“On May 15, Anwar Ibrahim, a leader of the newly elected Hope's Pact coalition government, was released from prison, three weeks ahead of his previously scheduled release date of June 8,” Markit said in a recent note. “Before his release, he was granted a full royal pardon, making him eligible once again to enter the parliament, which is a prerequisite for current Malaysian prime minister Mahathir Mohamad to be able to transfer the premiership to him.”

Political volatility is often a consideration for investors mulling single-country emerging markets ETFs, but historically, EWM is not heavily volatile. The ETF has a three-year standard deviation of 16.91 percent, or less than 100 basis points above the same metric on the MSCI Emerging Markets Index.

“The stability of the PH relies on the balance of power between Mahathir and Anwar and is particularly sensitive to the transition of the premiership from the former to the latter,” said Markit.

What's Next

EWM holds 47 stocks, over 34 percent of which hail from the financial services sector. If political volatility increases again and affects the country's banks, EWM could see renewed selling pressure. Investors have pulled $96.10 million from EWM since the start of the current quarter.

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Kuala Lumpur photo by Jimmy McIntyre/Wikimedia.