Having proven analysts wrong, Indonesian ETFs - highly
vulnerable to the escalated Fed tapering - held up pretty well
against the broader emerging market space to start this year. With
a large current account deficit, tumbling currency, rising
inflation and slowing growth, the biggest economy in Southeast Asia
was poised to suffer more this year.
Investors should note that this economy returned only 3% in 2012
and plunged about 20% last year. While many thought the nation
would undergo more suffering in 2014 thanks to the beginning of the
end of a cheap-dollar era which will cause reversal in foreign
capital flow, Indonesia ETFs surprisingly saw havoc returns so far
Let's find out how these managed to avoid emerging market sell-offs
so far this year (read:
3 ETFs Tumble Most on Emerging Market Sell-Off
Behind the Outperformance
Swing Back to Trade Surplus:
Indonesia recorded a trade surplus in the last three months of the
year with the biggest gain being witnessed in December thanks to
continued improvement in exports. Exports in December grew 10.3%
year over year against analysts' estimate of just 1.80%.
A fragile currency - which lost about 21% last year - played its
role to bolster exports while a ban on unprocessed mineral ore
shipments effective mid-January expedited procurement of ores by
the world ahead of the ban. Investors should note that among
various metal ores, Indonesia is the world's biggest producer and
exporter of nickel, and accounts for 18-20% of global supply (read:
Why Nickel ETFs Might Be a Great 2014
Meanwhile, domestic consumption slipped to 5.3% from 5.5% in 4Q13
bringing the much-needed respite to the country's current account
deficit and easing the stubbornly high inflation. The trade surplus
in December totaled
- the largest balance since December 2011 - on top of the November
trade surplus of $790 million that breezed past the estimate of
$550 million as polled by economists.
The uptick in exports, especially mineral ores, resulted in
faster-than-expected GDP growth (5.72% y/y) in the final quarter of
2013, up from 5.62% in the previous quarter, breaching a two-year
stretch of slowing GDP growth rate, as per
General Election Another Windfall:
Indonesia is due for its parliamentary election in April and has a
presidential election in July. Thus, the possibility of an influx
of campaign spending could bolster the companies that have more
domestic exposure especially which are engaged in food, consumer
staples and media businesses, as per
A few of the leading investment managers of Indonesia appeared
optimistic about the country's stock market performance this year.
Historically, Jakarta stock index added a massive return in the
prior two election years - 87% in 2009 and 45% in 2004 and
investors hope that history repeats itself in 2014 (read:
Is it time to buy Indonesia ETFs?
Market & ETF Impact
Thanks mainly to these abovementioned factors, the Jakarta Stock
Exchange Composite Index gained modestly over the last one month
while gains were more pronounced in the ETF world in the
year-to-date time frame.
iShares MSCI Indonesia Investable Market Index Fund
Market Vectors Indonesia ETF (
Market Vectors Indonesia Small-Cap ETF (
have returned 12.8%, 11% and 17%, respectively, while the broader
emerging market fund,
iShares MSCI Emerging Markets ETF
), lost 2.2% during the same time frame. Notably, smaller caps
benefited more than the larger ones from the election spending.
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 $336.6 million in about 111 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 it accounts for roughly
35% of assets, followed by 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-fifth of
exposure. It has a significant focus on large cap stocks (about
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 $184.4 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 31.5% taken by
consumer staples (16%) and consumer discretionary (14%). 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 21.2% exposure in China, 5.6% in Singapore
and 3.3% in Thailand.
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 (27.1%) and energy
(16.1%). 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% of the
While things are now in favor of Indonesia, the country might fail
to sustain this uptrend in the near future. As much as $500 million
worth of monthly mineral ore shipments has stalled since
mid-January due to the new policies. This badly timed policy will
likely pull down the skyrocketed export figures of the nation which
in turn will cast a shadow on GDP growth.
With 175 bps of interest rate hike last year and some more likely
this year - thanks to more than 8% of inflation, consumer spending
is expected to remain weak in the coming quarters thus leaving no
scope for GDP to outperform.
On the other hand, pre-election campaign spending will likely be in
place during the first part of this year. Amid such a backdrop,
small-caps oriented fund IDXJ would be a wise bet if investors seek
a touch of Indonesia in their portfolio.
We currently have Zacks ETF Rank #3 (Hold) for all three Indonesia
ETFs, though they have clearly held up better than most in the
emerging world in the face of the turmoil, and could be interesting
developing market picks for later this year as well.
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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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