Malaysia ETF Parties Like It's 1998, But That's Not A Good Thing

Forgive for taking liberties with Prince songs, but at least the iShares MSCI Malaysia ETF EWM existed in 1998 during the dark days of the Asian Financial Crisis. The lone Malaysia exchange traded fund actually debuted in the first quarter of 1996.

That is relevant because Malaysia's currency, the ringgit, is acting like it's 1998 and that is not a good thing. Back then, then-Prime Minister Mahathir Mohamad blamed George Soros, who knows a thing or two about shorting currencies, for sending the ringgit tumbling. These days, the ringgit is in free-fall. Whether or not hedge fund legends are behind the latest decline is immaterial.

What traders are pondering is whether or not Malaysia's central bank will revisit the use of capital controls as it did in the late 1990s and the ongoing impact of widespread corruption in the Asian nations.

“For Malaysia, the pressure is mounting as Prime Minister Najib Razak faces a probe of fund transfers into his personal bank accounts,” according to Emerging Equity.

A Closer Look

A year ago, $1 bought 3.1670 ringgit. At time of writing during Monday's Asian session, $1 buys 4.1030 ringgit, according to Bloomberg data.

Over that period, EWM has shed a third of its value while the MSCI Emerging Markets Index, of which Malaysia is the ninth-largest country weight at 3.1 percent, is down less than 9 percent. Things were not supposed to be this way for EWM, an ETF identified by some market observers as having the potential to endure hawkish changes in the Federal Reserve's interest rate policy.

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The backbone of the pro-EWM-as-U.S.-rates-rise thesis was Malaysia's robust current account surplus and significant foreign exchange reserves. However, those reserves have since dwindled below $100 billion for the first time in five years.

“A 17 percent slide in foreign-exchange reserves this year to $96.7 billion at the end of July suggests the central bank had been intervening to prop up the ringgit, just as Prime Minister Najib Razak faces a probe of fund transfers into his personal bank accounts. Political machinations were among the causes of the ringgit’s decline, the prime minister wrote in his blog on Thursday,” according to Bloomberg.

Malaysia’s Central Bank Governor Zeti Akhtar acknowledges the country's currency reserves need to be fortified, but for the moment, she is resisting the implementation of capital controls.

For those grappling with long positions in EWM, an ETF that has tumbled 23.7 percent over the past 90 days, the hope is a sequel of the Asian Financial Crisis is not repeated. EWM hit an all-time high closing high of $15.75 on February 1, 1997. Ten months later, the ETF closed at $5. It took until 2011 before EWM notched another close above $15.

EWM's recent price action confirms at least one thing: Malaysian stocks are betraying their usually docile-by-comparison reputation. EWM has a three-year standard deviation of 11.87 percent compared to 13.17 percent for the MSCI Emerging Markets Index, according to iShares data.