Interest In Indonesia ETFs

Markets Benzinga

Among emerging markets single-country exchange traded funds, the iShares MSCI Indonesia ETF (EIDO) and the VanEck Vectors Indonesia ETF (IDX) can get lost in the shuffle, but Indonesian equities are solid performers this year.

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Taking A Trip To Indonesia

EIDO and IDX, the older of the two Indonesia ETFs, are up an average of 8.5 percent year-to-date, though that lags the almost 13 percent returned by the MSCI Emerging Markets Index. Although it is Southeast Asia's largest economy, Indonesia is merely the ninth-largest geographic weight in the MSCI Emerging Markets Index at 2.5 percent.

Some international investors see reasons to embrace Indonesian financial markets, but acknowledge the potential for political volatility.

Over 70 percent of attendees surveyed on 23 March said that now is the time to increase exposure to Indonesia, up from around 50 percent last year, said Fitch Ratings in a recent note. They were particularly optimistic about infrastructure investment. Almost 90 percent of our attendees expected capital spending to increase significantly in 2017 and 2018, while construction was the sector expected to benefit the most from government policies. The recent increase in debt issuance by state-owned enterprises to finance infrastructure projects supports these views.

The ratings agency polled attendees at a recent credit briefing in Jakarta.

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A Country Beyond Coal

While Indonesia is widely known as a major coal producer, it is often overlooked that the country reentered the Organization of Petroleum Exporting Countries 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.

While Indonesia is a major commodities producer, the aforementioned ETFs are not heavy on commodities sectors. In the case of EIDO, that ETF devotes just 10 percent of its weight to energy and materials stocks. Those sectors combine for just over 13 percent of IDX's weight. Overall, IDX holds 42 stocks and EIDO holds 85.

Both ETFs are heavily allocated to financial services stocks, a familiar trait among single-country emerging markets ETFs. EIDO's weight to that sector is almost 37 percent, well ahead of the 27 percent allocation to that sector found in IDX.

The Bottom Line

Indonesia's difficult business environment has gradually improved since a strong reform drive was launched by Jokowi's government in September 2015, said Fitch. The reforms should support investment and medium term growth, and were a key factor in our decision to put the sovereign rating on Positive Outlook in December. Political developments that stall reforms or increase obstacles to their implementation could undermine this positive momentum.

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