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Surprise Rate Hike Puts Indonesia ETFs in Focus

Zacks Equity Research

Encouraging U.S. data has once again threatened emerging markets. As speculations of the Fed tapering its stimulus recurred on a surprise rise in jobs and robust GDP in the third quarter, growth in emerging markets has once again slowed down.
This is resulting in a strong dollar against a basket of major currencies, leading to huge capital outflows and pressure on current account deficits. This was especially bad news for the hardest hit markets, and in particular Indonesia, as worries over emerging markets growth and currency have rocked this country more than others (read: 3 Emerging Market ETFs Surviving the Slump).
Concerns are building over economic growth, widening current account deficit and inflationary levels in this consumer-centric economy. Growth has fallen to 5.6% in the third quarter, the lowest level in four years. Though inflation dropped slightly to 8.32% in October from 8.4% in September, it is still quite high.
The country’s current account deficit narrowed to 3.8% of GDP for the third quarter from 4.4% in the second quarter but fells short of the government estimate of 3.3–3.5%. This number is still not enough to end the malaise that has spread across the nation.
In order to restore some confidence in the nation’s financial system and support the rupiah, the country’s central bank unexpectedly raised its benchmark rate by 25 basis points to 7.5%. This represents the fifth hike in the policy rate this year, and with this, the total increase comes to 175 basis points.
Rate Hike Leads to Broad Sell-Off
The surprise move by the Indonesian Central Bank failed to end the recent turmoil in Southeast Asia's largest economy. Indonesian stocks experienced a sell-off in Tuesday trading with the Jakarta stock exchange falling by 2% in the session. The nation’s currency also tumbled, pushing the rupiah to four-and-a-half year lows against the U.S. dollar (read: Indonesia ETFs Slide on More Currency Troubles).
This poor performance was also felt in the ETF world, with Indonesian ETFs seeing heavy volume and uncertain trading. However, this trend is unlikely to remain in place in the near future if inflation continues to drop, current account deficit consistently narrows, and currency stabilizes.
As such, investors may want to consider taking advantage of this sell-off by looking at any of the three following ETFs. The trio has a decent ETF Rank of 3 or ‘Hold’ rating and could be interesting picks for risk tolerant investors:
iShares MSCI Indonesia Investable Market Index Fund (EIDO)
This is the most popular ETF tracking the Indonesian market with AUM of $373.4 million and average daily volume of nearly 590,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 106 securities in its basket while charging 61 bps in annual fees from investors.
The product is somewhat concentrated across both sectors and securities. The top two firms account for more than 10% of the total assets while from a sector look, financial dominates the fund’s return with more than one-third share. Though the fund provides exposure to all caps, it puts more focus on large caps at 78%.
EIDO has lost 18% in the year-to-date time frame.
Market Vectors Indonesia ETF (IDX)
Though this product has a bit less in AUM than EIDO, it is still quite popular with roughly 377,000 shares exchanging hands on a daily basis. The ETF follows the Market Vectors Indonesia Index, holding a basket of about 51 companies that are based in or do a majority of their business in the Southeast Asian nation.
The product puts more than 55% of total assets in top 10 holdings, suggesting moderate concentration. Additionally, large caps are pretty prevalent, as these make up for 90% of assets, leaving just a tad for small and mid cap stocks. With respect to sector holdings, financials again take the largest share at 32.5%, closely followed by consumer staples (15.9%) and consumer discretionary (13.3%).
The ETF charges 59 bps in fees per year from investors. The fund has lost nearly 19% so far this year (read: Is it time to buy Indonesia ETFs?).
Market Vectors Indonesia Small-Cap ETF (IDXJ)
Unlike the other two, this is a small cap centric fund. It is unpopular and less liquid having AUM of $6 million and average daily volume of less than 27,000 shares. The fund tracks the Market Vectors Indonesia Small Cap Index while charges 61 bps in annual fees.
Holding 36 stocks, the product does a decent job of spreading out assets as no single company makes up more than 6.85% of the total. However, it is a bit concentrated from a sector look as financials take the top spot at 41% while industrials and energy round off to the next two spots at 27.1% and 16.1%, respectively.
This fund is down 12% in the year-to-date time frame.
Bottom Line
Though these product have seen some gains following the ‘no taper’ announcement by the Fed in September, reemergence of tapering fears, emerging market concerns, strong dollar and some specific nation woes sparked fears across the nation (see: all the Emerging Asia Pacific ETFs here).
While it is difficult to say whether Indonesia can pull out of this latest slide or the nation’s current account deficit will continue to narrow, investors could take a look at this nation in the short term but with great caution.
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