An Important Sector Firms For Indonesia ETFs

The Market Vectors Indonesia Index Etf IDX and the iShares MSCI Indons Invstbl Mrkt Indx Fd EIDO are each up just over 28 percent year-to-date. That easily outpaces the 18.5 percent returned by the MSCI Emerging Markets Index.

Indonesia ETFs' resurgence is market by some of the same themes that are lifting other ETFs tracking developing economies, namely rebounding commodities prices and currencies. While Indonesia is widely known as a major coal producer, it is often overlooked that the country reentered the Organization of Petroleum Exporting Countries (OPEC) this year, levering Indonesian stocks to rebounding oil prices.

Thanks to efforts by the government there and an accommodating central bank, Indonesia, Southeast Asia's largest economy, is regaining the confidence of global investors.

Financial Allocations

Like many single-country emerging markets ETFs, particularly those tracking Asian economies, EIDO and IDX are heavily allocated to financial services companies. In the case of the Indonesia ETFs, that is a positive at the moment because the country is home to some sturdy banks.

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“Fitch Ratings believes the credit profiles of the nine Indonesian banks rated by Fitch on the international scale are sufficiently resilient to withstand weaker commodity prices; pressure on the rupiah; higher NPLs; and a challenging operating environment; supported by their strong profitability and capitalisation. However, pressure would be greater on medium-sized banks with larger mining and foreign-currency loan exposure, but their buffers remain generally adequate, and most can count on backing from highly rated foreign parents,” said the ratings agency in a recent note. 

IDX, the older of the two Indonesia ETFs, allocates 27.2 percent of its weight to bank stocks, or 950 basis points more than its weight to consumer staples, its second-largest sector weight. EIDO is even more dependent on banks as that group accounts for nearly 37 percent of that ETF's weight, or about 2,000 basis points more than the fund devotes to consumer discretionary names.

Indonesian banks also have robust capital buffers, in some cases even more than their larger international counterparts.

“Capital-impairment risk is therefore likely to be low for most major Indonesian banks in a stress environment. The large lenders could also rely on their high core capital buffers in the event of outsized asset-quality shocks; their average Tier 1 was 17.5 percent at end-June 2016, and the Tier 1 capital in this ratio is made up entirely of common equity. Many major foreign-owned banks tend to have lower core capital buffers than that, but Fitch believes they are likely to benefit from extraordinary support from their highly rated parent banks,” added Fitch.

Full ratings data available on Benzinga Pro.