Enigmatic Indonesia ETFs: No Emerging Markets Refuge

August 3rd at 6:00am by Tom Lydon

Some emerging markets ETFs, such as those tracking Brazil and China, have been duds for all of this year. Others have had stretches of delivering decent performances, but have since withered. Put the Market Vectors Indonesia ETF (NYSEArca: IDX) and the iShares MSCI Indonesia ETF (NYSEArca: EIDO) in the latter category.

Indonesian stocks started 2013 in fine form, helping EIDO and IDX display noticeable leadership as funds tracking the BRIC nations disappointed investors. In the first quarter, Morgan Stanley upgraded Indonesian equities to positive from neutral, citing improved earnings, calling Southeast Asia’s fourth-largest economy its most preferred market. [Indonesia ETFs Are on a Tear]

The Indonesian economy expanded 6.23% over 2012, supported by private consumption, which accounted for 55% of GDP. A growing middle class was seen as the driver of that domestic consumption and a prime reason Indonesia posted growth of at least 6% over the past three years. However, EIDO and IDX were unable to escape the May/June swoon that crushed emerging markets ETFs.

A faltering rupiah and fears about the Federal Reserve tapering quantitative easing, the same factors that pressured much of the emerging world, acted as a wet towel on EIDO and IDX. Investors dumped emerging market assets and exchange traded funds in droves, with the prospect of diminished global stimulus seen as the reason why. [Emerging Markets ETFs Stumble on Fed Fears]

Although some emerging markets ETFs ticked higher in July and some were “less bad,” neither sentiment can be applied to IDX and EIDO. The two funds lost an average of 5.5% last month while the Market Vectors Indonesia Small-Cap ETF (NYSEArca: IDXJ) tumbled 11.1%. [July ETF Performance Report]

The medium-term outlook is not encouraging. Indonesia posted a July consumer price index increase of 8.6%. Second-quarter GDP growth was 5.81% compared with economists’ expectations of 5.93%. The first-quarter growth rate was 6.02%. Private consumption and investment spending also declined last quarter.

Last month, Morgan Stanley reversed course on Indonesia, calling it the most vulnerable Southeast Asian market to capital outflows. Credit Suisse said higher energy costs, combined with monetary policy tightening, will probably hit already weakening investment growth and drag economic expansion to 5.7 percent in 2013, reports Harry Suhartono for Bloomberg.

JPMorgan lowered Indonesia to overweight last month and over the past 30 days, the comparable Philippines, Thailand and Vietnam ETFs have all outpaced EIDO and IDX.

Market Vectors Indonesia ETF

ETF Trends editorial team contributed to this post.

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.

Tickers