Indonesia's GDP Growth Misses Expectations: ETFs In Focus

Indonesia's economy grew slower than expected. GDP for the third quarter grew 5.06% year over year, per Badan Pusat Statistik Indonesia. This was below expectations of 5.13%, per a Reuters poll. Indonesia's GDP grew 5.01% year over year in the second quarter of 2017.  

Indonesia's consumer prices increased 3.58% year over year in October compared with 3.72% in September and 0.01% on a monthly basis, per the Central Statistics Agency. The inflation is well within the central bank's target range of 3-5%.

Economic Fundamentals

Indonesia's central bank unexpectedly cut its benchmark interest rate twice, by 25 basis points each in August and September. It now stands at 4.25%. This was primarily possible because of the low inflation the country is experiencing (read: Indonesia Unexpectedly Cuts Interest Rate: ETFs in Focus).

Commodity prices have been rebounding on stronger global growth cues. This has led to an increase in Indonesian exports, as it increased 17% year over year in the third quarter. However, consumer spending and credit growth continues to be subdued despite the central bank having cut its key benchmark interest rate eight times since last year. Consumer spending increased 4.93% year over year in the third quarter compared with 4.95% in the previous quarter.

These factors introduce a possibility of the central bank easing policy further in the coming monetary policy meets.

External Factors

Foreign Direct Investment increased 12% year over year in the July-September quarter compared with 10.6% in the second quarter. Indonesia's economy is projected to grow 5.4% in 2018. However, finance minister Sri Mulyani Indrawati said that a pickup in investments might help GDP to grow at a faster pace.

The Federal Reserve left its benchmark interest rate steady in the October meeting, but the markets widely expect the Fed to hike rates in December. Per the CME Fed watch tool, there is a 96.7% chance of a rate hike by 25 basis points.

Although a rate hike generally reduces the appeal of emerging market investments, the impact of these events on the Indonesian markets is still difficult to predict. This is primarily because markets are scaling record highs and showing lesser correlation to events that are generally a game changer for emerging markets.

In the current scenario, let us discuss a few ETFs focused on providing exposure to Indonesian equities (see all Broad Emerging Market ETFs here).  

iShares MSCI Indonesia ETF EIDO

This fund is appropriate for investors looking to gain exposure to companies based in Indonesia. Thus, it offers a pure play on Indonesia.

It has AUM of $483.7 million and charges a fee of 63 basis points a year. From a sector look, Financials, Consumer Discretionary and Telecommunication Services are the top three allocations of the fund, with 34.3%, 13.6% and 13.1% exposure, respectively (as of Nov 3, 2017). From an individual holdings perspective, Bank Central Asia, Telekomunikasi Indonesia and Bank Rakyat Indonesia (Persero) are the top three holdings of the fund, with 11.4%, 11.4% and 9.8% allocation, respectively (as of Nov 3, 2017). The fund has returned 13.1% year to date and 7.2% in a year (as of Nov 6, 2017). EIDO has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

VanEck Vectors Indonesia Index ETF IDX

This fund seeks to provide a bet on Indonesia by investing in companies based out of the nation or the ones who have a great deal of business interest there.

It has AUM of $65.6 million and charges a fee of 58 basis points a year. From a sector look, Financials, Consumer Staples and Consumer Discretionary, are the top three allocations of the fund, with 30.2%, 16.4% and 13.2% exposure, respectively (as of Sep 30, 2017). From an individual holdings perspective, Bank Central Asia, Astra International and Bank Rakyat Indonesia (Persero) are the top three holdings of the fund, with 8.6%, 7.0% and 6.9% allocation, respectively (as of Nov 6, 2017). The fund has returned 14.5% year to date and 7.1% in a year (as of Nov 6, 2017). IDX has a Zacks Rank #3 with a High risk outlook.

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