Emerging markets are an important part of the global economy and
increasingly significant contributors to the global growth. Their
high return potential and low correlation with the developed
markers are main reasons why they should be a part of any
diversified investment portfolio.
Most investors think about China and India when planning to
invest in emerging Asian countries and many investors already have
some exposure to these giant nations. Further, with both these
countries facing significant headwinds currently, it is time that
the investors take a serious took at some of new rising countries
in that region. Indonesia is one such country which offers solid
growth potential for future. (Read:
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Indonesia was one of the worst suffers of the Asian currency
crisis in 1997-98. The country has since transitioned from a
dictatorship riddled with corruption and inefficiency to a
democracy on the path of fast growth driven by significant market
The economy has grown at an annual rate exceeding 5% in seven of
the past eight years, mainly due to increasing consumption by the
rising middle class. The country now has a population of more than
240 million, behind only China, India and the U.S. (Read:
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Foreign exchange reserves have risen to $110.5 billion (as of
March 2012) from about $20 billion in mid 1997. Thus the currency,
(which had declined about sevenfold during the crisis) has become
much more stable with the central bank willing to defend it using
reserves. At the same time, the external debt has declined from
over 150% of GDP in 1998 to 26.7% of GDP in 2011.
Indonesia was one of the very few countries which had a positive
stock market performance in 2011. Its bond market was the best
performer in Asia last year. (Read:
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The economy is expected to grow at 6.1% and 6.6% respectively in
2012 and 2013 (per IMF) after an impressive 6.5% growth in 2011.
GDP for Q1 grew 6.3% year-over-year, which while slightly down from
the 6.5% growth recorded in the previous quarter, is still one of
the highest growth rates in the world.
Rising domestic demand in the country is able to offset the
weaker export demand. 65% of the GDP is domestic consumption driven
in the Southeast Asia's largest economy and thus the economy
remains much less exposed to global economic headwinds.
Foreign direct investment has been rising. During the first
quarter, the country attracted $5.6 billion in FDI (up 30%), which
seems to be in-line with the governmentÂ's target of attracting
$22.4 billion in FDI this year, 18% higher than last year.
Moody's and Fitch have recently upgraded the credit rating of
the country to investment grade.
Looking at the negative side of the story-Inflation has been
creeping up towards 6% and fiscal consolidation is the main
solution in containing inflation (difficult task due to massive
fuel subsidies). Corruption and poor infrastructure remain some of
the main hurdles to faster growth.
Last week, the central bank left the key rate unchanged at a
record low of 5.75% for the third straight month, after having cut
the rate by 25 bps earlier this year and by 50 bps late last
The investors currently have a choice of two ETFs which provide
exposure to the broader Indonesian economy.
IDX seeks to track Market Vectors Indonesia Index, which
provides exposure to publicly traded companies that are domiciled
and listed in Indonesia or generate at least 50% of their revenues
in Indonesia. The fund currently manages $508.9 million in assets
and holds 43 securities.
Van Eck recently cut the expense ratio to 57 bps from 60 bps
earlier. In terms of sector exposure, financials are at the top
with 30.2% weight, followed by energy (15.1%) and consumer staples
(13.6%). The ETF has returned 48.4% to the investors since its
inception. The fund's annual dividend yield is 1.57%.
iShares MSCI Indonesia Investable Market Index
EIDO tracks the MSCI Indonesia Investable Market Index, which is
designed to measure the performance of stocks in the top 99% by
market cap of the stocks listed in Indonesia.
The ETF holds $238.8 million in 87 securities and is thus must
more diversified than IDX. However, like IDX, this fund also has
largest allocation to financials (31.5%), and the next two are
consumer discretionary (16.8%) and consumer staples (12.2%). The
fund charges 59 bps and has risen 16.7% since inception.
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