U.S. Markets closed

Indonesia ETF in Five-Day Crash as Volume Spikes


The iShares MSCI Indonesia (EIDO) has lost nearly 20% in a five-day sell-off punctuated by a surge in trading volume. Investors are running for the exits as the emerging market’s currency also craters.

EIDO has been slammed by a plunge in Indonesian stocks and weakness in the rupiah currency.

The cost to insure Indonesian debt against default has jumped to an almost two-year high, Bloomberg News reports.

“The nation’s shares have tumbled at the fastest pace worldwide this quarter amid concern the quickest inflation in four years will spur the central bank to tighten monetary policy further after it raised the benchmark interest rate in June and July,” according to the story.

A widening current account deficit and talk that the Federal Reserve will taper its bond purchases have also driven the sell-off.

“Like India, which is in the midst of its own currency crisis, Indonesia suffers from a stubborn current account deficit, making it heavily reliant on foreign capital for funding,” the Financial Times reports.

“People extrapolate that if Indonesia continues to run a current account deficit and the Fed begins tapering, then it could become increasingly difficult for them to fund the deficit,” said Euben Paracuelles, an economist at Nomura, in the FT article.

EIDO was down more than 3% on Wednesday, one day after trading volume spiked to more than 4 million shares, the second-highest in the ETF’s history.

Morningstar analyst Patricia Oey said the fund is quite risky, due in part to Indonesia’s volatile currency.

“More recently, slowing commodity demand, particularly from China, is weighing on Indonesia’s current account. And during periods of high global market volatility, investors tend to quickly pull out of riskier assets. During such periods, investors in this fund likely will suffer from a combination of falling asset prices as well as a falling rupiah,” she said in a report on EIDO.

“Foreign investors poured into Indonesia’s equity and debt markets over the past two years,” Oey wrote.” A sudden reversal in flow could negatively affect the local markets and the value of the Indonesian rupiah.”

Other ETFs tracking this market include Market Vectors Indonesia Index ETF (IDX) and Market Vectors Indonesia Small-Cap ETF (IDXJ).

iShares MSCI Indonesia

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.