Indonesian stocks and ETFs have rebounded strongly this year and are leading the Southeast Asian space higher. The bullish sentiment is primarily driven by the optimism of the new president Joko Widodo, popularly known as “Jokowi”, and his reforms to revive growth in Southeast Asia’s largest economy.
The market is speculating that the new reforms would likely improve the presently sluggish growth, weak currency, widening current account deficit and rising inflation in the country. Notably, economic growth slowed to 5.12% in the second quarter of 2014 from 5.22% growth recorded in the first quarter, marking the lowest level in almost five years.
These point to tough challenges for Jokowi to endure the worst slowdown when he assumes office in October. But the new president aims to push economic growth rate to 7% in two years by introducing various education and health programs, expanding infrastructure, and creating more jobs. This represents the highest growth since the 1997–98 Asian financial crisis.
Jokowi is targeting more foreign investments and increase in exports rather than trying out a cheap-money policy, which could enlarge the current account deficit and kept investors worrying. He is also looking to relax the nation’s reliance on Australian cattle imports, curb corruption and reduce domestic income inequality (read: Indonesia ETFs in Focus Ahead of Elections).
Given stepped-up measures and hopes of economic revival under the Jokowi presidency, the Jakarta Composite Index is expected to climb as much as 17% to 6,000 by the end of 2015, according to PT Ashmore Asset Management fund manager Arief Wana. This in turn will drive the rally in the related ETFs as well.
Inflation in Indonesia eased to the lowest level in more than two years on easing inflationary pressure. In fact, inflation dropped to 3.99% year over year in August from 4.53% in July. Another report showed that trade balance swung to surplus of $0.13 billion in July from a deficit of $0.3 billion in June.
The recent consumer sentiment survey has also been extremely positive with the monthly Indonesian Consumer Confidence Index climbing to a two-year high of 119.8 in July from 116.3 in June. In addition, the country’s consumer expectation index, covering economic conditions over the next six months, jumped 4.3 points to 125.7 in July. This indicates increased consumer confidence over the health of the Indonesian economy.
Moreover, Indonesian currency, the rupiah, strengthened nearly 4% against the greenback this year on more foreign capital inflows into the country and a modest inflation rate. This trend is likely to continue in the coming months on improving fundamentals (read: Inside the Indonesia ETF Turnaround).
Given the new government’s promise to turn around the beleaguered economy, funds targeting the country will remain lucrative choices for investors seeking solid capital appreciation opportunities. Below, we have highlighted three Indonesian ETFs that will continue to benefit from Joko Widodo’s growth reforms. All the three products have a favorable ETF Rank of 3 or ‘Hold’ rating, suggesting room for upside in the coming months.
iShares MSCI Indonesia Investable Market Index Fund (NYSEARCA:EIDO)
This is the most popular ETF tracking the Indonesian market with AUM of $584.6 million and average daily volume of nearly 633,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 105 securities in its basket while charging 62 bps in annual fees from investors.