Free trade boosts Malaysia (EWM)

"China and 10 Southeast Asian nations has launched the world’s third-largest free trade area," notes Carl Delfeld in his ETF of the Week. One beneficiary: iShares Malaysia (NYSE: EWM).

"Trade between China and the 10 states that make up the Association of Southeast Asian Nations (with a combined GDP of over $1 trillion) has soared in recent years, to $192.5 billion in 2008, from $59.6 billion in 2003.

"The new free trade zone, which will remove tariffs on 90%percent of traded goods, is expected to increase that number but there will be losers and winners as China applies even more economic pressure on ASEAN manufacturers.

"The zone will rank behind only the European Economic Area and the North American Free Trade Area in trade volume. It will affect 1.9 billion people.

"The free trade area is expected to help Asian countries increase exports, particularly those with commodities that resource-hungry China badly needs.

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"This brings us to Malaysia which is likely one of the countries that will benefit most from this agreement.

"The iSgares Malaysia ETF has long been a favorite of mine, though like most emerging markets, appears to be a bit on the expensive side.

"It is a solid middle-income country with a good demographic profile and a nicely balanced economy. Its 28 million citizens are a diverse lot: 54% Malay, 25% Chinese, 8% Indian and 11% Bumiputra.

"Malaysian banks were for the most part not affected by the global credit crisis last year as most were not very involved in derivatives.

"Due to progress in manufacturing and services, Malaysia in incrementally garnering a Singapore like reputation as a high quality and investor-friendly place to do business. I referred to this trend as Malaysiapore in a recent Forbes Asia column.

"Importantly, Malaysia is the world’s largest producer of palm oil - a cheaper substitute for vegetable or sunflower oil which are used in cooking.

"In addition to palm oil and rubber, Malaysia is blessed with an abundance of forestry, fertile agricultural land and minerals like copper and iron-ore.

"Crude oil and Natural gas were discovered offshore in the 1970s and today Malaysia subsidizes gasoline for domestic consumers and is a net exporter of crude oil. Malaysia is Asia’s third most trade-dependent economy, after Singapore and Hong Kong.

"Prime Minister Najib Razak, has said that the downturn has exposed Malaysia’s over-dependence on exports. He wants services to account for 70% of GDP in the future, up from 54% now.

"Since Islam is the largest and official religion in Malaysia, the financial sector follows the principles of Islamic finance and takes a conservative approach compared to banks in other countries.

"Since Independence from the British, the country has been a Parliamentary democracy with a stable government in most years. Corruption is lower in Malaysia relative to other ASEAN countries such as Indonesia or Thailand.

"Although Malaysia has had limited success in innovation based industries like IT, biotechnology, semiconductors, it has been able to excel in the agricultural and commodity sector and more recently is heavily encouraging the growth of tourism, healthcare and education sectors.

"Going forward, a recently released World Bank report opined that Malaysia will remain in a 'middle-income trap' unless it can add value to its economy. Perhaps the competition spurred by this trade zone will take Malaysia to the next level."