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Can Indonesia ETFs Extend the Rally?

Zacks Equity Research

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 Slump?).  

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.

Market Impact

Given the abrupt change in investor sentiment, all three Indonesia ETFs underperformed massively, with iShares MSCI Indonesia Investable Market Index Fund (EIDO) declining  5.5%, Market Vectors Indonesia Small-Cap ETF (IDXJ) plunging 8.8% and Market Vectors Indonesia ETF (IDX) falling 4.9%.

On the contrary, border emerging market ETF iShares MSCI Emerging Markets ETF (EEM) 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 (see 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 fund.

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 total.

IDXJ also has a Zacks ETF rank of 4 with a high risk outlook.

Bottom Line

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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