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 saw havoc returns so far this year.
Let’s find out how these managed to avoid emerging market sell-offs so far this year.
Behind the Outperformance
Swing Back to Trade Surplus: Indonesia recorded a trade surplus in the last three months of the year with the biggest gain being witnessed in December thanks to continued improvement in exports. Exports in December grew 10.3% year over year against analysts’ estimate of just 1.80%.
A fragile currency – which lost about 21% last year – played its role to bolster exports while a ban on unprocessed mineral ore shipments effective mid-January expedited procurement of ores by the world ahead of the ban. Investors should note that among various metal ores, Indonesia is the world’s biggest producer and exporter of nickel, and accounts for 18–20% of global supply (read: Why Nickel ETFs Might Be a Great 2014 Investment).
Meanwhile, domestic consumption slipped to 5.3% from 5.5% in 4Q13 bringing the much-needed respite to the country’s current account deficit and easing the stubbornly high inflation. The trade surplus in December totaled $1.52 billion – the largest balance since December 2011 – on top of the November trade surplus of $790 million that breezed past the estimate of $550 million as polled by economists.
The uptick in exports, especially mineral ores, resulted in faster-than-expected GDP growth (5.72% y/y) in the final quarter of 2013, up from 5.62% in the previous quarter, breaching a two-year stretch of slowing GDP growth rate, as per trading economics.
General Election Another Windfall: Indonesia is due for its parliamentary election in April and has a presidential election in July. Thus, the possibility of an influx of campaign spending could bolster the companies that have more domestic exposure especially which are engaged in 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, Jakarta stock index added a massive return in the prior two election years – 87% in 2009 and 45% in 2004 and investors hope that history repeats itself in 2014.
Market & ETF Impact
Thanks mainly to these abovementioned factors, the Jakarta Stock Exchange Composite Index gained modestly over the last one month while gains were more pronounced in the ETF world in the year-to-date time frame. iShares MSCI Indonesia Investable Market Index Fund (EIDO), Market Vectors Indonesia ETF (IDX) and Market Vectors Indonesia Small-Cap ETF (IDXJ) have returned 12.8%, 11% and 17%, respectively, while the broader emerging market fund, iShares MSCI Emerging Markets ETF (EEM), lost 2.2% during the same time frame. Notably, smaller caps benefited more than the larger ones from the election spending.