Encouraging U.S. data has once again threatened emerging markets. As speculations of the Fed tapering its stimulus recurred on a surprise rise in jobs and robust GDP in the third quarter, growth in emerging markets has once again slowed down.
This is resulting in a strong dollar against a basket of major currencies, leading to huge capital outflows and pressure on current account deficits. This was especially bad news for the hardest hit markets, and in particular Indonesia, as worries over emerging markets growth and currency have rocked this country more than others.
Concerns are building over economic growth, widening current account deficit and inflationary levels in this consumer-centric economy. Growth has fallen to 5.6% in the third quarter, the lowest level in four years. Though inflation dropped slightly to 8.32% in October from 8.4% in September, it is still quite high.
The country’s current account deficit narrowed to 3.8% of GDP for the third quarter from 4.4% in the second quarter but fells short of the government estimate of 3.3–3.5%. This number is still not enough to end the malaise that has spread across the nation.
In order to restore some confidence in the nation’s financial system and support the rupiah, the country’s central bank unexpectedly raised its benchmark rate by 25 basis points to 7.5%. This represents the fifth hike in the policy rate this year, and with this, the total increase comes to 175 basis points.
Rate Hike Leads to Broad Sell-Off
The surprise move by the Indonesian Central Bank failed to end the recent turmoil in Southeast Asia’s largest economy. Indonesian stocks experienced a sell-off in Tuesday trading with the Jakarta stock exchange falling by 2% in the session. The nation’s currency also tumbled, pushing the rupiah to four-and-a-half year lows against the U.S. dollar (read: Indonesia ETFs Slide on More Currency Troubles).
This poor performance was also felt in the ETF world, with Indonesian ETFs seeing heavy volume and uncertain trading. However, this trend is unlikely to remain in place in the near future if inflation continues to drop, current account deficit consistently narrows, and currency stabilizes.
As such, investors may want to consider taking advantage of this sell-off by looking at any of the three following ETFs. The trio has a decent ETF Rank of 3 or ‘Hold’ rating and could be interesting picks for risk tolerant investors: