Leaving most analysts in utter shock, Indonesia’s main opposition party, PDI-P which named the popular Jakarta governor Joko Widodo as its presidential candidate, did not obtain enough votes in the parliamentary elections last week. This leaves no option for PDI-P apart from forming a coalition for its presidential ticket.
Investors should note that the news of popular figure Widodo’s candidature in mid-March spread rounds of positive sentiment in the Indonesian stock market which added 3% following the news. Now, with this unsatisfactory outcome, the Indonesian market shed more than 3% on April 10. Indonesia’s benchmark JSX Index otherwise rallied 15% this year on political hopes.
While the political scenario seems to lose its charm, economic factors too appear out of favor. Bank of Indonesia slashed the nation’s growth estimate this year. The bank referred to a slowing household spending – which basically accounts for over the half of Indonesia’s GDP – and a veto on mineral-ore shipments – which in turn hurt Indonesia’s export profile – as the reasons for this reduction.
Bank of Indonesia also revealed that the nation’s household spending will likely benefit less from this year’s election than the previous elections. The growth expectation by the central bank was trimmed to the 5.5–5.9% range, from the prior estimate of between 5.8% and 6.2%.
Notably, last year, Indonesia’s scored GDP growth of 5.8%, which was the slowest since 2009. Also, brokerage firm UBS believes that the nation will deliver sluggish economic numbers in Q1 2014, further adding to Indonesia’s woes in the short term.
Given the abrupt change in investor sentiment, all three Indonesia ETFs underperformed massively, with iShares MSCI Indonesia Investable Market Index Fund (NYSEARCA:EIDO) declining 5.5%, Market Vectors Indonesia Small-Cap ETF(NYSEARCA:IDXJ) plunging 8.8% and Market Vectors Indonesia ETF (NYSEARCA:IDX) falling 4.9%.
On the contrary, border emerging market ETF iShares MSCI Emerging Markets ETF (NYSEARCA:EEM) dipped 0.3% during the same time fame (read: 3 Emerging Market ETFs to Watch for Political Issues in 2014).
In our opinion, three Indonesia ETFs might see rough trading in the days to come. In fact, with general emerging market concerns still in place thanks to the QE taper program in the U.S., we expect the massive rally for these products to stall in the weeks ahead. Below we have discussed the products in detail for investors curious about the Indonesia investing options for their portfolios:
EIDO in Focus
The most popular ETF tracking the Indonesian market is EIDO, a product that looks to track the MSCI Indonesia Investable Market Index. The fund invests $467.9 million in about 109 stocks, charging investors 62 basis points a year in fees for the exposure.
EIDO is a bit concentrated in financials as this sector accounts for roughly 35% of assets, followed by the 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-fifths of exposure. It has a significant focus on large cap stocks (about 75%). EIDO currently has a Zacks ETF rank of 4 or Sell rating with high risk outlook.