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Indonesia ETFs in Focus on Strong Rupiah

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As the Central bank of Indonesia hiked the benchmark interest rates from 4.5% to 4.75%,for the second time in May, ETFs exposed to the country saw a surge in short-term performances. On May 31, the rupiah was valued at 13.94 against the dollar, its strongest performance since May 4.

This was a widely expected move, as the rupiah, has been one of the worst performing Asian currencies in 2018. This can be attributed to the sudden pullout of investors’ funds from the bond and stock markets, due to rising U.S. Treasury yields and a strong dollar performance. (read: Indonesian Stocks Rally: ETFs in Focus).

Can Reforms Actually Boost the Economy?

Indonesia has been in trouble because of its dependency on foreign capital to manage current-account deficit. Also 38% of the government bonds is controlled by foreigners, which poses substantial risk to the country’s economy. The central bank governor has given hints of further rate hikes, which would depend on domestic and international developments. It will depend on the Fed’s monetary policy, Italy crisis and U.S.-China trade war impacts.

Analysts believe that rate hikes will hamper growth and slow down business activities. Hence, this policy should only be considered on a short-term basis. In the first quarter of 2018, the GDP growth of 5.06%is already slower than expected. Consumer spending has remained slow, exports have increased by 9% in Aprilas compared to a year ago. Inflation has remained low at an average of 1.3% in the January-May period, which is under control (read: What Lies Ahead for Emerging Market ETFs?).

The government of Indonesia is keeping an eye on the state-run infrastructure firms which have huge debt to deal with. The central bank is also looking to balance the sudden capital outflow by providing larger proportions of local currency into the market and include bilateral currency swaps with Japanas a preventive tool to stop further losses. With a reformist government, which has decided to restore investor confidence and attract investments, most policy makers believe that the country will be able to return to normalcy.

The Indonesian ETFs have performed well in the last one week on account of a stronger rupiah. Let us look at those ETFs that have done well in this period.

VanEck Vectors Indonesia Index ETF IDX

The fund tracks the performance of the MVIS Indonesia Index. It has an asset base of $54.6 million and comprises 42 holdings. With an annual fee of 57 basis points the fund has average daily volume of shares traded at 32,700. Bank Central Asia, Telecomunikasi Indonesia and bank Rakyat are the top three individual holdings with none holding more than 9%. As for sector weightage, Financials, Consumer Staples and Consumer Discretionary are prominent, with allocations of 30%, 16% and 12.6%, respectively. In terms of country exposure, Indonesia and China are the top slots with 65.7% and 19.3% proportions, respectively. The fund has returned 3.9% in the past week (as of Jun 4, 2018) and has a Zacks ETF Rank #2 (Buy).

iShares MSCI Indonesia ETF EIDO

The fund tracks investment results of the MSCI Indonesia Investable Market Index. It has an AUM of $389.5 million and average daily trade volume of 1.03 million shares. The fund comprises 84 stocks and has an expense ratio of 0.62%. Bank Central Asia, Telecomunikasi Indonesia and Bank Rakkyat are the top individual allocations in this portfolio with weightage of 12.7%, 10.1% and 9.7% respectively. Financials, Consuumer Staples and Consumer Discretionary are the top sectors with 36.4%, 14.2% and 12.2% allocations, respectively. The fund has grown 3.4% on a weekly basis (as of Jun 4, 2018) and carries a Zacks ETF Rank #2 (read: Emerging Market ETFs in Focus on High Outflows).

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ISHARS-MS INDON (EIDO): ETF Research Reports
VANECK-INDONES (IDX): ETF Research Reports
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