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Timing not Quite Right for Indonesia ETFs


Emerging markets exchange traded funds have come storming back in recent weeks, but that does not mean the forecast is sunny for the entire group.

The iShares MSCI Indonesia ETF(EIDO) and the Market Vectors Indonesia ETF (IDX) are the primary ETFs tracking Southeast Asia’s largest economy and the two are off an average of 11% year-to-date. That loss has been significantly trimmed as the EIDO and IDX have gained an average of 18.5% since the start of September. [Indonesia ETF Bounces After Deep Sell-Off]

Some analysts still see risks ahead for Indonesia, a market that has been wracked by inflation, a widening current account deficit and a weak rupiah, this year’s worst-performing emerging markets currency.

“Higher subsidized fuel price, higher minimum wages, weakening of rupiah and higher interest rates are expected to pressure earnings growth in 2013-14. We expect earnings growth to reach +3% and +10% in 2013-14, respectively, lower than consensus estimates of +9% and +15%. Thus, consensus downward adjustments are likely,” Citigroup said of earnings expectations for Indonesian firms in a note obtained by Barron’s.

Even with the struggles of Indonesian stocks this year and that concerning outlook from Citi, EIDO and IDX holdings are not particularly cheap at a time when large developing economies such as China and Russia are home to some of the most heavily discounted stocks in the emerging world. [Indonesia ETFs Still Aren't Cheap]

The Jakarta Stock Exchange Composite Index is trading close to the lower end of its historical range, but it is not as cheap as it was during the global financial crisis and Indonesian stocks still look somewhat pricy relative to the broader emerging markets universe.

Citi is not the only global bank taking a cautious view of Indonesia. Early this month, Credit Suisse said, “Indonesia’s favorable long-term growth story remains intact, but, in our view, it was never quite as positive as most people thought.” [Indonesia ETFs: Value Potential]

Citi did not identify particular sectors it views as vulnerable, but EIDO investors should keep an eye an on Indonesian banks, discretionary and staples names as those sectors combine for nearly 63% of the ETF’s weight.

iShares MSCI Indonesia ETF