I haven’t done an economics-related post since we left Cambodia, but our recent travels have got me thinking again. While Brunei’s development can be simply described as wise stewardship of petrodollars, Singapore is truly an economic miracle. For a state that was in tears when it was kicked out of the Malaysian Federation, it has done pretty well. Its ability to attract not just trade to its port, but also huge inflows of intellectual and monetary capital, has made it global business center. But we weren’t in Singapore long enough to get anything more than an academic feel for its economy (although the shopping tempted Joylani to contribute to their GDP). Instead, this post will be mainly focused on Malaysia, where we’ve spent the past month.

Traditionally, Malaysia’s economic story has been commodities. This is apparent as soon as you travel anywhere in the country. Driving through the country, you could go for hours without seeing anything but palm plantations. Flying over or into the nation, the landscape looks like a bunch of green dots arranged in nice straight rows. For decades, the nation’s fortunes has risen and fallen with the price of palm oil and rubber. Malaysia’s other major commodity is oil. Malaysia’s early Malay leaders sought to include parts of Borneo in their new state, in order to increase the ratio of Malays to Chinese in the future Malaysian Federation. Along with a bunch of ethnic Malays to bolster their political power, Borneo came with a lot of oil. The country’s most iconic images, the Petronas Towers, were built by the nation’s largest corporation, Petronas, an oil conglomerate. Pick up any financial paper and you’ll undoubtedly read about the so-called “commodities super-cycle.” Super-cycle or not, commodities across the board have enjoyed a meteoric price increase in the past several years. Consequently, unprecedented amounts of capital are pouring into country, fueling its economy. Additionally, its large, educated, English-speaking population is beginning to be noticed by multi-national corporations (MNCs). Hi-tech manufacturing plants have been established in Malaysia (chances are, your hard-drive casing is made there) and I expect more growth in that area as China’s currency continues to appreciate. Electronic components are already Malaysia’s largest export and the reason why the US and Japan are its largest trading partners, respectively. As far as services are concerned, some are looking towards Malaysia for their IT/BPO needs. As India’s wages increase and competitiveness in that sector begins to rely more on quality than price, Malaysia should be a prime benefactor. Travelling around SEA, Malaysia seems to be the most developed country aside from tiny Brunei and Singapore. It has invested heavily not only in traditional infrastructure projects, but in business-dependent areas such as telecommunications. The government is keen to attract foreign capital and is consistently ranked as one of the easiest nations in which to do business. Its GDP hovers around 5%, while inflation has been contained below 3% (thanks in part to government subsidies, which most Asian countries use).

Before you throw all your money in Malaysian ETF though, know the risks. Although the subprime crisis did not hit Malaysia directly, the resulting global market turmoil took the KL Composite down along with virtually every other bourse around the world. As a former British colony with a huge Chinese population, Malaysia’s markets are highly connected and thus, correlated, with both European and Asian markets. The risks of this have been evident in the past few months, as the markets been dragged down despite no real changes in fundamentals. Secondly, although commodities have done quite well lately, a downturn could have negative affects on the nation, much as they did after other commodity bubbles popped. Lastly, Malaysia is still feeling the effects of the 1997 Asian Financial Crisis. Many buildings built 10 years ago are still vacant, unable to attract tenants. Even the famous Petronas Towers, completed 10 years ago, still have not reached full occupancy. The vast oversupply of real estate, that was built during the bubble leading up to crisis, has still yet to find sufficient demand. Although currencies in the region are now much more correlated to fundamentals, the prospect of an overheating economy or one that grows just a bit too quickly for its own good is still a possibility. Despite the risks, Malaysia should be on any Asian investor’s shortlist or anyone looking to gain exposure to Asia or commodities. The growth potential and the government’s commitment to encourage that growth is attractive. Plus, Malaysia has far less political risk than most Asian markets. I believe Malaysia to be a great long-term buy, especially given the recent correction in valuations.