Inside The Indonesia ETF Turnaround [Market Vectors Indonesia Index Etf, Market Vectors ETF Trust]

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May 22, 2014 4:43pm NYSE:EIDO NYSE:IDX

indonesiaAfter posting dismal returns last year, Indonesia ETFs had an impressive run during the first quarter of 2014. In fact, a popular Indonesian fund – iShares MSCI Indonesia (NYSEARCA:EIDO) –successfully recovered the 25% it lost during 2013, in the first three months of this year itself.

While huge current account deficits, tumbling currency, rising inflation and slowing growth led to the fund’s poor performance last year, the build-up to the parliamentary elections held in the country last month helped lift the markets higher during the first three months of 2014.

However, after posting gains for three straight months, Indonesian ETFs lost some momentum last month after PDI-P – Indonesia’s main opposition party – did not win enough seats in the parliamentary elections to send its presidential candidate, the Jakarta Governor, Joko Widodo, to the general election this July.

Investors should note that the news of Widodo being named as PDI-PI’s presidential candidate in mid March had spread a sense of optimism in the Indonesian equity markets. He was expected to bring in market friendly measures.

Nonetheless, the positive sentiment in the market is back again on the news that Indonesia’s presidential frontrunner has selected Golkar party’s Jusuf Kalla – a popular former vice president – as his running mate for the July elections (read:India Election Results: Can Indian ETFs Roar Higher?).

With Kalla on his side, there are bright chances of Widodo winning the ballot. Kalla, an influential public figure, was vice president during the first term of President Susilo Bambang Yudhoyono. During his tenure, Kalla was quite successful in inducing parliament to support government reforms.

High Hopes from Widodo

Popularly known as “Jokowi”, Widodo has become quite famous during his tenure as governor of the Indonesian capital Jakarta. Not only did his down-to-earth style win him immense popularity, but he is also expected to change the way the country has been ruled so far.

He is even wooing top fund managers with the bait that if elected he would bring in pro-investor measures such as a cut in fuel subsidies, improved infrastructure and significant bureaucratic reforms to attract investment, in an event organized byinvestment firm CLSA. Jokowi is also expected to improve workforce capability and encourage energy investment in Indonesia.

ETF Impact 

Given the positive change in investor sentiment, all three Indonesian ETFs have booked gains this month, with EIDO gaining 6.4%, Market Vectors Indonesia ETF (IDX) adding 5.2% andMarket Vectors Indonesia Small-Cap ETF (IDXJ) rising 2.7%. This indeed is a turnaround as all the three ETFs had shed 1% to 5% in April.

With the elections just a month away, these funds might see some more short-term gains, if Jokowi gets elected. We have briefly highlighted below the three Indonesia ETFs.

EIDO in Focus

The most popular ETF tracking the Indonesian market, EIDO, looks to track the MSCI Indonesia Investable Market Index. The fund invests $506.4 million in about 109 stocks, charging investors 59 basis points a year in fees for the exposure.

After losing 3.4% in April, EIDO has gained 6.4% this month and is up 33% since the start of the year (see all Asia Pacific – (Emerging) ETFs here).

IDX in Focus

The fund holds a basket of 153 stocks, with 53.7% allocated to its top 10 firms, suggesting concentration risk. Telekomunikasi Indonesia, Astra International and PT Bank Central Asia are the top three holdings. Financials dominates the fund, followed by Consumer Staples and Consumer Cyclical sectors.

The fund charges 57 basis points as fees.  IDX has gained 5.5% in May and is up 31.5% so far this year.

IDXJ in Focus

This relatively new product from Market Vectors, IDXJ 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.

Financials dominates the fund here too, followed by Industrials and Energy. The fund has gained 24.45% in the year-to-date time frame.

Bottom Line

The Indonesian markets expect a radical change in the policy making of the nation in the face of dwindling growth numbers. Southeast Asia’s biggest economy expanded 5.2% during the first quarter of the year – the slowest rate since 2009. Moreover, the nation’s tight monetary policy is acting as a hindrance to growth.

Indonesia’s central bank has slashed its growth target for this year. The bank expects full-year gross domestic product to grow between 5.1% and 5.5%, lower than its previous estimate of 5.5% and 5.9%.

Ban on exports of copper and minerals has adversely hit the country’s growth. Moreover, the country’s current account deficit is expected to widen in the upcoming quarters due to seasonal factors (read: 3 Sector ETFs for This Shaky Market).

While Jokowi’s coming to power might be favorable for the markets in the long run, it will still take some more time for the Indonesian markets to finally get back into shape. Weak forecast by the central bank also corroborates this fact.

Though the Indonesian ETFs might see some more gains in the short run, they are expected to give in to gravity sooner than later. We have a Zacks ETF Rank #4 or Sell rating on the above ETFs, indicating tough times in the longer term, though the short term could definitely still have potential.

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