Elections have taken center stage in Indonesia. Southeast Asia’s
largest economy is due for its parliamentary election in April and
its presidential election in July. This has sent the Jakarta stock
market higher since the start of the year. The likelihood of an
influx of campaign spending bolstered the companies having more
domestic exposure especially which hail from food, consumer staples
and media businesses, as per Bloomberg.
A few of the leading investment managers of Indonesia appeared
optimistic about the country’s stock market performance this year.
Historically, the Jakarta stock index added massive returns in the
prior two election years – 87% in 2009 and 45% in 2004. Investors
have every reason to believe that 2014 will be no exception (read:
Is it time to buy Indonesia ETFs?).
If this was not enough, Indonesia's main opposition party, PDI-P,
declared on Friday that the popular Jakarta governor Joko
Widodo will be its presidential candidate. This spread
another round of positive vibes in the investing world and the
Indonesian market climbed about 3% on the news.
Its currency, the rupiah, also jumped to its highest level against
the dollar in five months. The top two pure-play ETFs on Indonesia
–
iShares MSCI Indonesia Investable Market Index
Fund (
EIDO) and
Market Vectors
Indonesia ETF (
IDX) – gained as much as,
respectively, 6.5% and 6.0% on Friday’s session.
Investors by and large seem confident about a seamless voting
process in July with the extremely popular (especially among the
poor and middle classes) Jakarta governor’s candidature. The
investing community expects him to run the world's third largest
democracy post election. Within one year of his service as the
governor of the Indonesian capital Jakarta, Joko Widodo – a
furniture manufacturer – has gained quite a following among the
masses.
A Jokowi presidency is being viewed as a trend reversal in
Indonesian politics which has been so far regulated by the members
of the military and influential political figures. Also, the world
market now expects a radical change in the policy making of the
nation which was underperforming heavily thanks to weak leadership,
slowing growth, widening current account deficit and a tumbling
currency.
How to Tap This Opportunity?
Investors should note that Indonesia has been Asia's best performer
this year, advancing more than 20% even amid the Ukrainian crisis
and its geopolitical impact on the global markets (read: How Did
Indonesia Avoid the Emerging Market ETF Slump?).
Three Indonesian ETFs,
EIDO, IDX and
Market Vectors Indonesia Small-Cap ETF
(
IDXJ), have returned 24.8%, 20.1% and 27.2%,
respectively, while the broader emerging market fund,
iShares MSCI Emerging Markets ETF
(
EEM), lost more than 7% year-to-date. We have
highlighted below the three Indonesia ETFs in detail:
EIDO in Focus
The most popular ETF tracking the Indonesian market is EIDO, a
product that looks to follow the MSCI Indonesia Investable Market
Index. The fund invests $440.2 million in about 108 stocks,
charging investors 62 basis points a year in fees for the exposure
(see Southeast Asia ETF Investing 101).
EIDO is a bit concentrated in financials as it accounts for roughly
30% of assets, followed by consumer sectors which, if joined both
cyclical and non-cyclical, make up a similar amount of assets. The
product is also highly concentrated in the top 10 holdings with
about three-fifths of exposure. It has a significant focus on large
cap stocks (about 80%).
IDX in Focus
This is the oldest Indonesia ETF on the market, as it made its
debut in January 2009. The product tracks the Market Vectors
Indonesia Index and charges 59 basis points in fees which make it a
slightly cheaper choice. IDX allocates its $213.5 million of assets
to roughly 53 companies at time of writing. Large caps account for
more than 85% of the fund.
Financials make for the top sector with about 27%, followed by
consumer staples (16%) and consumer discretionary (15%). However,
the product has a diversified geographical approach with Indonesia
accounting for about 60% of the portfolio. This is the reason why
IDX’s year-to-date return is a little less than that of its
Indonesian cousins.
IDXJ in Focus
This relatively new product from Market Vectors might entice
investors willing to tap the smallest publically traded companies
in Indonesia. The ETF tracks an index of small and micro cap
securities that are heavily exposed to Indonesia, holding roughly
36 stocks in total. The fund charges 61 bps in fees.
The portfolio tilt is a little different in this case. Industrials
take up the top spot with a 32% focus followed by a 23% exposure in
real estate. Energy occupies the third position of the fund.
Still, the portfolio is relatively well-spread out from an
individual holding perspective, as barring the top three
allocations, no single company makes up for more than 6.28% of the
total.
Bottom Line
Among the trio, the return from IDXJ remains the best thanks to its
single-minded focus on the domestic economy. IDXJ is made up of
small-cap stocks which tend to offer exposure in the regional field
and are less ruffled by broad global concerns. While IDXJ should be
a clear winner in the recent rally, the other two funds should also
benefit from Joko Widodo’s (if he wins the election) pro-growth
approach.
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ISHARS-EMG MKT (EEM): ETF Research Reports
ISHARS-MS INDON (EIDO): ETF Research Reports
MKT VEC-INDONES (IDX): ETF Research Reports
MKT VEC-INDO SC (IDXJ): ETF Research Reports
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