Robust Growth Outlook Driving Indonesia ETFs Higher

Exchange traded fund tracking Indonesia, Southeast Asia's largest economy, got off to a slow start this year. While other emerging markets were surging in January and February, Indonesia ETFs were disappointing, foretelling nasty declines ahead. To be fair, the slow start to 2012 for ETFs such as the Market Vectors Indonesia Index ETF IDX and the iShares MSCI Indonesia Investable Market Index Fund EIDO was slow in comparison to other ETFs tracking other Southeast Asian nations. The plunges, however, were fast and furious. IDX shed about 20 percent of its value from March through June. EIDO was flirting with $32 in April. By June, the ETF was trading near $25. The funds have come roaring back and there could be more upside for IDX, EIDO and the newly minted Market Vectors Indonesia Small-Cap ETF IDXJ. Earlier this week, Indonesian President Susilo Bambang Yudhoyono told CNBC he expects his country to post GDP growth of 6.5 percent next year. Indonesia's economic growth will, not surprisingly, propel the country up the global economic totem pole. A report by the McKinsey Global Institute, said Indonesia will have the seventh-largest economy in the world by 2030, surpassing the U.K. and Germany along the way. Not Perfect Despite the encouraging outlook and expected ascent to one of the 10 largest economies, Indonesia has its share of doubters. For example, ratings agency Standard & Poor's has been reluctant to elevate Indonesia's sovereign credit rating to investment-grade status. While Indonesian policymakers believe their country is deserving of the investment-grade rating from S&P, the ratings agency cited increased risk in the country's mining sector due to government policies as one reason for not lifting its rating on the country. It is the specter of higher mining royalties and increased government regulation that has pressured Indonesian small-caps, in turn making for a tough debut year for IDXJ. Simply put, with its eyes on investment-grade status, Indonesia cannot afford to take actions that are viewed as a deterrent to foreign direct investment. It has been foreign direct investment that has buoyed the economy and played a role in driving Indonesia ETFs higher. In 2011, FDI into Indonesia set a record, rising 18 percent from 2010. The second-quarter number this year jumped 30.2 percent on a year-over-year basis to $5.92 billion, according to the Jakarta Globe. Still, any government action that can be viewed as hostile to the mining sector could be an issue for Indonesia ETFs. Assuming it is the industrial and materials sectors that would be most adversely impacted, the scenario needs to be acknowledged with the aforementioned ETFs. IDX devotes a combined 14.2 percent of its weight to those sectors. EIDO's weight to the pair is nearly 16 percent. Industrials alone make up 22.3 of IDXJ's weight. The Consumer A point that is often lamented about the allure of emerging markets is the rise of the consumer in those nations. Indonesia is no different. The country's Indonesia's economy will be powered by an estimated 90 million additional consumers with considerable spending power by 2030, CNBC reported, citing the McKinsey report. Waiting for 2030 to roll around is not a luxury many investors have. In the meantime, there are ways to capitalize on Indonesia's growing domestic consumption and the rise of its consumer class. The new EGShares Emerging Markets Domestic Demand EMDD features an allocation of 16.5 percent to Indonesia while discretionary names comprise 15.5 percent and 13.4 percent of EIDO and IDX, respectively. For more on Indonesia ETFs, click here.