Can Indonesia ETFs Rebound in 2013?
Indonesia ETFs returned just about 3% in 2012, which was very disappointing compared to the strong performance by the ETFs tracking other Southeast Asian nations like Philippines and Thailand.
The underperformance was in contrast to the strong GDP growth in the country—6.2% for 2012. The IMF expects the country to grow at 6.3% in 2012. Indonesian stock market had returned about 12% last year but the currency had taken a beating—resulting in ETFs’ underperformance. (Read: The Key to International ETF Investing)
Indonesia’s economy has grown at an annual rate exceeding 5% in seven of the past eight years, mainly due to increasing consumption by its rising middle class (130 million per World Bank). Also due to thriving domestic demand, which drives about two-thirds of GDP, the economy is largely shielded the global headwinds.
Moody’s and Fitch have recently upgraded the credit rating of the country to investment grade. Due to strong economic expansion, foreign investors have continued to pour money into Southeast Asia’s largest economy.
Foreign direct investment (FDI) reached a record level of $24.6 billion last year, up 26% from the previous year--despite some of the restrictive policies adopted by the Government of late. (Read; Best Latin America ETFs for 2013-Mexico, Colombia)
Foreign exchange reserves have risen to $110 billion (as of October 2012) from about $20 billion in mid-1997, when the currency declined about sevenfold during the Asian financial crisis. External debt has declined to 26.7% of GDP in 2011 from over 150% of GDP in 1998.
Further, as a result of prudent macroeconomic management, Government debt as a share of GDP has fallen by over 70% over the last decade and inflation has come down from double-digit to less than 5% currently. Earlier this month, the central bank left the key rate unchanged at 5.75% as inflation has remained within its target range.
According to a McKinsey report, Indonesia could become the world’s seventh largest economy by 2030, overtaking Germany and United Kingdom.
Thanks to its population of more than 240 million, with mean age of just 28 years, Indonesia’s demographic dividend will be key driver to its growth. (Read: Best ETF Strategies for 2013)
However, the country recorded its first annual trade deficit in 2012, even though a small one ($1.63 billion), as the imports surged 8.0% while the exports fell 6.6%.
Imports have been rising due to rapid growth domestic consumption and investment, while the exports have been hit by deckling global demand and falling prices for commodities. Further, 20% export tax introduced on mining commodities by the Government last year also seems to have affected the commodity exports.
Thanks to a weakening the current account position, the currency took a beating last year; losing 5.9% against the US dollar, making it the worst performing Asian emerging markets currency in 2012.
Depreciation worsened in the second and third quarter of last year on account of global economic uncertainty that led to decline in portfolio inflows, while the foreign exchange demand for imports continued to rise. We expect the current account position to improve this year as the global economy stabilizes resulting in increased demand for commodities.
Corruption and poor infrastructure remain some of the main hurdles to faster growth in the country. Recent floods highlighted the problems related to poor infrastructure in the country.
Market Vectors Indonesia Index ETF (IDX)
IDX seeks to track Market Vectors Indonesia Index, which provides exposure to publicly traded companies that are domiciled and listed in Indonesia or generate at least 50% of their revenues in Indonesia. The fund currently manages $405.8 million in assets and holds 41 securities.
The fund charges the investors 57 basis points for annual expenses. In terms of sector exposure, financials are at the top with 30% weight, followed by consumer staples (16%) and consumer discretionary (13%). The fund's annual dividend yield is 1.71% currently. IDX has Zacks ETF rank of 1 (Strong Buy).
iShares MSCI Indonesia Investable Market Index Fund (EIDO)
EIDO tracks the MSCI Indonesia Investable Market Index, which is designed to measure the performance of stocks in the top 99% by market cap of the stocks listed in Indonesia.
The ETF holds $445.7 million in 93 securities and is thus must more diversified than IDX. However, like IDX, this fund also has largest allocation to financials (35%), and the next two are consumer discretionary (16%) and consumer staples (12%). The fund charges 60 bps and pays out a 12-month yield of 1.11% currently. EIDO has Zacks ETF rank of 2 (Buy).
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