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Indonesian Stocks Rally: ETFs in Focus

Zacks Equity Research

 

Indonesian stocks reached record highs as foreign investors put in their money after the biggest daily net inflow in five months.

 

The Jakarta Composite Index rose 0.7% to reach an all-time high of 5,557.98 before falling to reduce its gain to 0.2%. Net buys from foreigners reached $138 million on Thursday, March 16, 2017. This was the biggest daily inflow since October 10, 2016 (read: Asian Markets Give Mixed Signals: ETFs in focus).

 

The Federal Reserve in the U.S raised its rate by 25 bps in the March 14-15, 2017 Federal Open Market Committee meeting. It, however, did not accelerate the timetable for future hikes. With inflation on its path to reach the target rate of 2%, analysts are questioning the probability of rate rises in 2018. A less hawkish policy by the Federal Reserve might push investor to higher risk foreign markets, in the hope of generating a higher return for their funds. A weaker dollar generally brings emerging market investments in the limelight (read: See How ETFs react when Hawks act like Doves).

 

There is speculation that the emerging market nation might get its rating upgraded by S&P.  This has sparked the interest of foreign investors.  

 

Let’s take a look at a couple of ETFs that provide a major exposure to Indonesia (read: Is the ETF Industry Outpacing Hedge Funds?):

 

iShares MSCI Indonesia ETF EIDO

 

This fund is appropriate for investors looking to gain exposure to companies that are based in Indonesia. It invests more than 70% of its funds in mostly large-cap Indonesian companies.

 

This fund is relatively concentrated in its top 10 holdings with around 62% allocated to the same. It is a relatively expensive bet to gain the required exposure, charging 62 bps in fees a year. The fund has AUM of $427 million and trades in an average volume of 672,000 shares. The fund returned 5.68% in the year-to-date time frame and 7.42% in the past one year. As such, EIDO currently has a Zacks Rank #3 (Hold) with a High-risk outlook.

 

VanEck Vectors Indonesia Index ETF IDX

 

This fund is appropriate for investors looking to gain exposure to companies that are based in the emerging market of Indonesia or have a great deal of business interest there. It invests more than 65% of its funds in large-cap Indonesian companies.

 

This fund is relatively concentrated in its top 10 holdings with around 55% allocated to the same. It is a relatively expensive bet to gain the required exposure, charging 58 bps in fees a year. The fund has AUM of $88 million and trades with an average volume of 41,000 shares. The fund returned 5.9% in the year-to-date timeframe and 7.0% in the past one year. As such, EIDO currently has a Zacks Rank #3 with a High-risk outlook.

 

Bottom Line

 

Investors are increasingly moving to emerging market investments to increase the return potential of their portfolio. Even though Indonesian markets are rallying due to higher inflow of foreign funds, it is uncertain whether the trend will continue. The timing of the next rate hike by the Federal Reserve and implementation of President Donald Trump’s protectionist policies which would be dollar supportive are not clear. As a result, we believe it’s prudent to remain on the sidelines for now.

 

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