Leaving most analysts in utter shock, Indonesia's main
opposition party, PDI-P which named the popular Jakarta governor
Joko Widodo as its presidential candidate, did not obtain enough
votes in the parliamentary elections last week. This leaves no
option for PDI-P apart from forming a
coalition for its presidential ticket
Investors should note that the news of popular figure Widodo's
candidature in mid-March spread rounds of positive sentiment in the
Indonesian stock market which added 3% following the news. Now,
with this unsatisfactory outcome, the Indonesian market shed more
than 3% on April 10. Indonesia's benchmark JSX Index otherwise
rallied 15% this year on political hopes (read:
How Did Indonesia Avoid the Emerging Market ETF
While the political scenario seems to lose its charm, economic
factors too appear out of favor. Bank of Indonesia
slashed the nation's growth estimate
this year. The bank referred to a slowing household spending -
which basically accounts for over the half of Indonesia's GDP - and
a veto on mineral-ore shipments - which in turn hurt Indonesia's
export profile - as the reasons for this reduction.
Bank of Indonesia also revealed that the nation's household
spending will likely benefit less from this year's election than
the previous elections. The growth expectation by the central bank
was trimmed to the 5.5-5.9% range, from the prior estimate of
between 5.8% and 6.2%.
Notably, last year, Indonesia's scored GDP growth of 5.8%, which
was the slowest since 2009. Also, brokerage firm UBS believes that
the nation will deliver sluggish economic numbers in Q1 2014,
further adding to Indonesia's woes in the short term.
Given the abrupt change in investor sentiment, all three Indonesia
ETFs underperformed massively, with
iShares MSCI Indonesia Investable Market Index
) declining 5.5%,
Market Vectors Indonesia Small-Cap ETF
) plunging 8.8% and
Market Vectors Indonesia ETF
) falling 4.9%.
On the contrary, border emerging market ETF
iShares MSCI Emerging Markets ETF
) dipped 0.3% during the same time fame (read:
3 Emerging Market ETFs to Watch for Political
Issues in 2014
In our opinion, three Indonesia ETFs might see rough trading in the
days to come. In fact, with general emerging market concerns still
in place thanks to the QE taper program in the U.S., we expect the
massive rally for these products to stall in the weeks ahead. Below
we have discussed the products in detail for investors curious
about the Indonesia investing options for their portfolios:
EIDO in Focus
The most popular ETF tracking the Indonesian market is EIDO, a
product that looks to track the MSCI Indonesia Investable Market
Index. The fund invests $467.9 million in about 109 stocks,
charging investors 62 basis points a year in fees for the exposure
Southeast Asia ETF Investing 101
EIDO is a bit concentrated in financials as this sector accounts
for roughly 35% of assets, followed by the consumer sectors which,
if joined, make up a similar amount of assets. The product is also
highly concentrated in the top-10 holdings with about three-fifths
of exposure. It has a significant focus on large cap stocks (about
75%). EIDO currently has a Zacks ETF rank of 4 or Sell rating with
high risk outlook.
IDX in Focus
This is the oldest Indonesia ETF making a debut in January 2009.
The product tracks the Market Vectors Indonesia Index and charges
59 basis point in fees which makes it a slightly cheaper choice.
IDX allocates its $231.5 million of assets to roughly 53 companies
at time of writing. Large caps account for more than 80% of the
The sector allocation pattern is almost the same as EIDO, as
financials make for the top sector with about 31% taken by consumer
staples (16%) and consumer discretionary (15%). However, the
product has a diversified geographical approach thanks to the
index's focus on companies that do at least half of their business
in the country and not necessarily those that are based in the
nation. This gives IDX 21.8% exposure in China, 5.3% in Singapore
and 3.1% each in Netherlands and Thailand.
IDX also has a Zacks ETF Rank of 4 with medium risk outlook.
IDXJ in Focus
This relatively new product from Market Vectors might entice
investors willing to tap the smallest companies in Indonesia. The
ETF tracks an index of small and micro cap securities that are
heavily exposed to Indonesia, holding roughly 36 stocks in total.
The fund charges 61 bps in fees.
Here also, the portfolio is pretty concentrated in financials, with
more than two-fifth focus trailed by industrials (27.0%) and energy
(16.0%). Still, the portfolio is relatively well-spread out from an
individual holding perspective, as barring the top-three
allocations, no single company makes up for more than 4.76% of the
IDXJ also has a Zacks ETF rank of 4 with a high risk outlook.
Indonesia ETFs had a good run this year buoyed by the hopes of a
pro-growth political win. Now, with the chance of that looking
feeble, we suggest investors who are still not in the market to
shun the products or to book profits in case they are already
invested in these funds.
Among the three products, IDXJ already suffered the most thanks to
its heavy focus on small-caps (which basically targets only
Indonesian growth and avoids global flavor in its portfolio) (read:
Inside the Recent China A Shares ETF Slump
IDX was a lesser hurt product thanks to its diversification across
geographies. However, IDX is also not risk-free as it offers
exposure to several slow growing countries like China and Thailand.
Thus we prefer to remain on the sidelines on Indonesia until a core
positive economic driver emerges.
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ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS INDON (EIDO): ETF Research Reports
MKT VEC-INDONES (IDX): ETF Research Reports
MKT VEC-INDO SC (IDXJ): ETF Research Reports
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