Why Indonesia ETFs are on a Tear

March 4th at 4:04pm by Tom Lydon

Indonesia stocks and exchange traded funds have been leading the equities market as the country attracts investors with its sustainable growth and companies’ improved earnings outlook.

The Market Vectors Indonesia ETF (NYSEArca: IDX) was one of the best performing ETFs over February, gaining 9.1% in the past month. [ETF Performance Report: February]

“Growth in both consumption and investment has been strong, and I believe, will be sustained for the next two to three years,” Indonesian Vice President Boediono said, reports Francezka Nangoy for The Jarkata Globe.

The Indonesian economy expanded 6.23% over 2012, supported by private consumption, which accounted for 55% of GDP. A growing middle class has helped bolster the economy – Indonesia’s GDP grew 6% each of the last three years, despite the global economic weakness.

Morgan Stanley has made Indonesian stocks its top pick due to improved earnings, according to a separate Jakarta Globe article.

“We upgrade Indonesia from neutral to positive and now rank it as our most preferred  … market,” Morgan Stanley said in a recent report.

On a survey of 110 mid- and small-sized Indonesian firms, the brokerage found that capital expenditure growth is expected to rise 15.7% in 2013 from 12.4% in 2012, profit growth will rise to 18.2% in 2013 from 16.3% and the proportion of companies with high business confidence increased to 37% from 22% in 2012.

Morgan Stanley projects the MSCI Indonesia Index to gain 13% from the current levels by the end of the year.

Nevertheless, some analysts are cautious, citing the country’s low quality in education and poor infrastructure as a major impediments to growth. Specifically, Alex Pollack, president of Honeywell International in Indonesia, points to the growing gap between skills required by the industry and the education system. Shinta Widjaja Kamdani, managing director of Sintesa Group, also warned that the country requires improvements in its airports, seaports and roads.

“With the government failing to cut the subsidy, how will they spend on infrastructure?” Shinta asked.

Other Indonesia country-specific ETFs include the Market Vectors Indonesia Small-Cap ETF (NYSEArca: IDXJ), which rose 10.2% over the last month, and iShares MSCI Indonesia Investable Market Index Fund (NYSEArca: EIDO), which gained 10.8%.

Market Vectors Indonesia ETF

For more information on Indonesia, visit our Indonesia category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.