Indonesia Trumps EM Skeptics

Having proven analysts wrong, Indonesian ETFs – highly vulnerable to the escalated Fed tapering – held up pretty well against the broader emerging-market space to start this year. With a large current account deficit, tumbling currency, rising inflation and slowing growth, the biggest economy in Southeast Asia was poised to suffer more this year.

Investors should note that this economy returned only 3% in 2012 and plunged about 20% last year. While many thought the nation would undergo more suffering in 2014 thanks to the beginning of the end of a cheap-dollar era which will cause reversal in foreign capital flow, Indonesia ETFs surprisingly have seen solid returns so far this year.

Let’s find out how the funds managed to avoid emerging-market selloffs so far this year (read: ).

EIDO is a bit concentrated in financials as it accounts for roughly 35% of assets, followed by consumer sectors which, if joined, make up a similar amount of assets. The product is also highly concentrated in the top-10 holdings with about three-fifth of exposure. It has a significant focus on large cap stocks (about 77%).

IDX in Focus
This is the oldest Indonesia ETF making a debut in January 2009. The product tracks the Market Vectors Indonesia Index and charges 59 basis point in fees which makes it a slightly cheaper choice.
IDX allocates its $184.4 million of assets to roughly 53 companies at time of writing. Large caps account for more than 80% of the fund.

The sector allocation pattern is almost the same as EIDO, as financials make for the top sector with about 31.5% taken by consumer staples (16%) and consumer discretionary (14%). However, the product has a diversified geographical approach thanks to the index’s focus on companies that do at least half of their business in the country and not necessarily those that are based in the nation. This gives IDX 21.2% exposure in China, 5.6% in Singapore and 3.3% in Thailand.

 IDXJ in Focus
This relatively new product from Market Vectors might entice investors willing to tap the smallest 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.

Here also, the portfolio is pretty concentrated in financials, with more than two-fifth focus trailed by industrials (27.1%) and energy (16.1%). 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 4% of the total.

Bottom Line
While things are now in favor of Indonesia, the country might fail to sustain this uptrend in the near future. As much as $500 million worth of monthly mineral ore shipments has stalled since mid-January due to the new policies. This badly timed policy will likely pull down the skyrocketed export figures of the nation which in turn will cast a shadow on GDP growth.

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With 175 bps of interest rate hike last year and some more likely this year – thanks to more than 8% of inflation, consumer spending is expected to remain weak in the coming quarters thus leaving no scope for GDP to outperform.

On the other hand, pre-election campaign spending will likely be in place during the first part of this year. Amid such a backdrop, small-caps oriented fund IDXJ would be a wise bet if investors seek a touch of Indonesia in their portfolio.

We currently have Zacks ETF Rank #3 (Hold) for all three Indonesia ETFs, though they have clearly held up better than most in the emerging world in the face of the turmoil, and could be interesting developing market picks for later this year as well.

Written By: Zacks Investment Research