Risks and Rewards With Indonesia ETFs

The MSCI Emerging Markets Index, one of the most widely followed gauges of developing world equities, is up 6.1 percent year to date. However, investors in some single-country emerging markets exchange traded funds are trouncing broader benchmarks with Indonesia being a prime example of that theme.

Let's Look To Indonesia

The Market Vectors Indonesia Index Etf IDX, the older of the two Indonesia ETFs, and the iShares MSCI Indons Invstbl Mrkt Indx Fd EIDO are up an average of 14 percent this year. 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.

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“Of the more than 100 attendees Fitch surveyed on 16 March, over 60 percent felt that the economic cycle had shifted from trough to recovery. When asked about positioning, over half felt that it was the right time to increase investments in Indonesia, versus just over 40 percent who responded they would stay neutral and only 3 percent who advocated a decrease. Confidence that capital spending and infrastructure investment would increase was also high among participants – a combined 85 percent responded that they were either very or somewhat optimistic that infrastructure spending would significantly accelerate in 2016–2017,” said Fitch Ratings in a recent note.

IDX And EIDO Reflect Renewed Investor Confidence

Some of that renewed confidence is being reflected in IDX and EIDO. During the first quarter, investors added nearly $17 million in new assets to the Market Vectors Indonesia and more than $210 million to EIDO. Those are impressive totals with EIDO's first-quarter asset-gathering acumen particularly notable because the ETF has $520.6 million in assets under management.

Concerns have previously been raised about the strength of Indonesian banks, which is an issue to consider with the aforementioned ETFs because IDX and EIDO sport weights to the financial services sector of 34 percent and 37 percent, respectively.

“Fitch maintains negative sector outlooks on Indonesian banks. Declining profitability, rising credit costs and growing NPLs contribute to the negative banking sector outlook. This was reflected in the participant survey with almost 60 percent saying that they were "very concerned" about asset quality. Fitch expects the trends in profitability and NPLs for Indonesian banks to continue this year, though the pace of deterioration is likely to slow,” said Fitch.

The good news is that the ratings agency sees robust profitability for Indonesian banks and expects the economy there to grow 5.1 percent this year followed by growth of 5.4 percent in 2017.