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After Indonesia ETFs Rally, Consumer Stocks Look Expensive


After the run-up in Indonesia stocks and related exchange traded funds on the elections euphoria, consumer sector stocks are beginning to look expensive.

Following Jakarta governor Joko Widodo’s presidential nomination, Indonesian stocks have moved into a bull market since March on the prospects that the contender could cut through the bureaucracy to kick-start the economy.

Year-to-date, the iShares MSCI Indonesia ETF (EIDO) is up 26.7% and Market Vectors Indonesia Index ETF (IDX) gained 24.9%. [Indonesia ETFs Jump Ahead of Presidential Elections]

Now, Farash Farich, a fund manager at PT AAA Asset Management, argues that further gains in consumer stocks will be limited after since shares are too expensive after rallying over the past five-years, Bloomberg reports.

The Consumer Goods Index was hovering around 24 times projected earnings for the next 12 months. Unilever Indonesia is trading around 37 times estimated profits, which makes the company the most expensive consumer staples stock in the world.

“I don’t expect consumer stocks to have strong growth ahead,” Farich said in the article. “Looking at their valuation right now, it seems the share price would only track earnings growth.”

However, some market observers are hopeful that the sector can maintain some growth ahead once a new president pushes for infrastructure updates. Both candidates have pledged to spend big on roads, ports and railways to help retailers access remote regions of the country.

“We see consumer companies in Indonesia as another way of playing the infrastructure cycle indirectly,” Mark Gordon-James, a senior investment manager at Aberdeen Asset Management, said in the article. “Any pro-infrastructure policy will in turn make the economy more competitive and those benefits will trickle down to the consumer.”

Consumer sectors are among the second and third largest segments in Indonesia-related ETFs, following financials. EIDO has a 17.9% weight toward consumer discretionary and 12.2% in consumer staples. IDX allocates consumer staples 15.7% and consumer discretionary 14.7%.

Additionally, broad emerging market consumer-focused ETFs include a small weight toward Indonesian stocks. The iShares MSCI Emerging Markets Consumer Discretionary ETF (EMDI) has a 5.1% weight in Indonesia. The EGShares Emerging Markets Consumer ETF (ECON) shows a 8.7% tilt toward Indonesia. The WisdomTree Emerging Markets Consumer Growth Fund (EMCG) has 4.3% in the southeast Asia market.

For more information on Indonesia, visit our Indonesia category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.