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Indonesia ETFs Soaring on Political Hopes

Zacks Equity Research

Elections have taken center stage in Indonesia. Southeast Asia’s largest economy is due for its parliamentary election in April and its presidential election in July. This has sent the Jakarta stock market higher since the start of the year. The likelihood of an influx of campaign spending bolstered the companies having more domestic exposure especially which hail from food, consumer staples and media businesses, as per Bloomberg.

A few of the leading investment managers of Indonesia appeared optimistic about the country’s stock market performance this year. Historically, the Jakarta stock index added massive returns in the prior two election years – 87% in 2009 and 45% in 2004. Investors have every reason to believe that 2014 will be no exception (read: Is it time to buy Indonesia ETFs?).

If this was not enough, Indonesia's main opposition party, PDI-P, declared on Friday that the popular Jakarta governor Joko Widodo  will be its presidential candidate. This spread another round of positive vibes in the investing world and the Indonesian market climbed about 3% on the news.

Its currency, the rupiah, also jumped to its highest level against the dollar in five months. The top two pure-play ETFs on Indonesia – iShares MSCI Indonesia Investable Market Index Fund (EIDO) and Market Vectors Indonesia ETF (IDX) – gained as much as, respectively, 6.5% and 6.0% on Friday’s session.

Investors by and large seem confident about a seamless voting process in July with the extremely popular (especially among the poor and middle classes) Jakarta governor’s candidature. The investing community expects him to run the world's third largest democracy post election. Within one year of his service as the governor of the Indonesian capital Jakarta, Joko Widodo – a furniture manufacturer – has gained quite a following among the masses.

A Jokowi presidency is being viewed as a trend reversal in Indonesian politics which has been so far regulated by the members of the military and influential political figures. Also, the world market now expects a radical change in the policy making of the nation which was underperforming heavily thanks to weak leadership, slowing growth, widening current account deficit and a tumbling currency.  

How to Tap This Opportunity?

Investors should note that Indonesia has been Asia's best performer this year, advancing more than 20% even amid the Ukrainian crisis and its geopolitical impact on the global markets (read: How Did Indonesia Avoid the Emerging Market ETF Slump?).  

Three Indonesian ETFs, EIDO, IDX and Market Vectors Indonesia Small-Cap ETF (IDXJ), have returned 24.8%, 20.1% and 27.2%, respectively, while the broader emerging market fund,  iShares MSCI Emerging Markets ETF (EEM), lost more than 7% year-to-date. We have highlighted below the three Indonesia ETFs in detail:

EIDO in Focus

The most popular ETF tracking the Indonesian market is EIDO, a product that looks to follow the MSCI Indonesia Investable Market Index. The fund invests $440.2 million in about 108 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 it accounts for roughly 30% of assets, followed by consumer sectors which, if joined both cyclical and non-cyclical, 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 80%).

IDX in Focus

This is the oldest Indonesia ETF on the market, as it made its debut in January 2009. The product tracks the Market Vectors Indonesia Index and charges 59 basis points in fees which make it a slightly cheaper choice. IDX allocates its $213.5 million of assets to roughly 53 companies at time of writing. Large caps account for more than 85% of the fund.

Financials make for the top sector with about 27%, followed by consumer staples (16%) and consumer discretionary (15%). However, the product has a diversified geographical approach with Indonesia accounting for about 60% of the portfolio. This is the reason why IDX’s year-to-date return is a little less than that of its Indonesian cousins.

IDXJ in Focus

This relatively new product from Market Vectors might entice investors willing to tap the smallest publically traded 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.

The portfolio tilt is a little different in this case. Industrials take up the top spot with a 32% focus followed by a 23% exposure in real estate. Energy occupies the third position of the fund.

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 6.28% of the total.

Bottom Line

Among the trio, the return from IDXJ remains the best thanks to its single-minded focus on the domestic economy. IDXJ is made up of small-cap stocks which tend to offer exposure in the regional field and are less ruffled by broad global concerns. While IDXJ should be a clear winner in the recent rally, the other two funds should also benefit from Joko Widodo’s (if he wins the election) pro-growth approach.

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