Exchange traded fund tracking Indonesia, Southeast Asia's
largest economy, got off to a slow start in 2012. While other
emerging markets surged in January and February,
Indonesia ETFs were disappointing
, and foretold nasty declines ahead.
To be fair, the slow start to 2012 for ETFs such as the Market
Vectors Indonesia Index ETF (NYSE:
) and the iShares MSCI Indonesia Investable Market Index Fund
) was slow in comparison to other ETFs tracking other Southeast
Asian nations. The plunges, however, were fast and furious.
IDX shed about 20 percent of its value from March through
June. EIDO was flirting with $32 in April. By June, the ETF was
trading near $25.
The funds have come roaring back and there could be more
upside for IDX, EIDO and the newly minted Market Vectors
Indonesia Small-Cap ETF (NYSE:
). Earlier this week, Indonesian President Susilo Bambang
he expects his country to post GDP growth of 6.5 percent in
Indonesia's economic growth will, not surprisingly, propel the
country up the global economic totem pole. A report by the
McKinsey Global Institute, said Indonesia will
the seventh-largest economy in the world by 2030
, surpassing the U.K. and Germany along the way.
Despite the encouraging outlook and expected ascent to one of
the ten largest economies, Indonesia has its share of doubters.
For example, ratings agency Standard & Poor's has been
elevate Indonesia's sovereign credit rating to
While Indonesian policymakers believe their country is
deserving of the investment-grade rating from S&P, the
ratings agency cited increased risk in the country's mining
sector due to government policies as one reason for not lifting
its rating on the country. It is the specter of higher mining
royalties and increased government regulation that has pressured
in turn making for a tough debut year for
Simply put, with its eyes on investment-grade status,
Indonesia cannot afford to take actions that are viewed as a
deterrent to foreign direct investment. It has been foreign
direct investment that has buoyed the economy and played a role
in driving Indonesia ETFs higher. In 2011, FDI into Indonesia set
a record, rising 18 percent from 2010. The second-quarter number
this year jumped 30.2 percent on a year-over-year basis to $5.92
according to the Jakarta Globe
Still, any government action that can be viewed as hostile to
the mining sector could be an issue for Indonesia ETFs. Assuming
it is the industrial and materials sectors that would be most
adversely impacted, the scenario needs to be acknowledged with
the aforementioned ETFs. IDX devotes a combined 14.2 percent of
its weight to those sectors. EIDO's weight to the pair is nearly
16 percent. Industrials alone make up 22.3 of IDXJ's weight.
A point that is often lamented about the allure of emerging
markets is the
rise of the consumer in those nations
. Indonesia is no different. The country's Indonesia's economy
will be powered by an estimated 90 million additional consumers
with considerable spending power by 2030, CNBC reported, citing
the McKinsey report.
Waiting for 2030 to roll around is not a luxury many investors
have. In the meantime, there are ways to capitalize on
Indonesia's growing domestic consumption and the rise of its
consumer class. The new EGShares Emerging Markets Domestic Demand
) features an allocation of 16.5 percent to Indonesia while
discretionary names comprise 15.5 percent and 13.4 percent of
EIDO and IDX, respectively.
For more on Indonesia ETFs, click
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