Run for Indonesia ETFs Isn’t Over

March 13th at 9:30am by Todd Shriber

So much for Indonesia’s status as member of motley crew known as the Fragile Five or “BIITS.” Southeast Asia’s largest economy is home the region’s second-best equity market this year behind Vietnam.

Soaring Indonesian equities have ignited the iShares MSCI Indonesia ETF (NYSEArca: EIDO) and the Market Vectors Indonesia Index ETF (NYSEArca: IDX), sending the two ETFs to an average year-to-date gain of 18.4%, which is roughly inline with the returns offered by the Market Vectors Vietnam ETF (NYSEArca: VNM). [A Bullish View on Asia's Top ETFs]

Indonesian equities may have more upside to come. The benchmark Jakarta Composite Index can climb 20% this year, adding another 10% to a gain of 10% through Wednesday, President Director Ito Warsito told Harry Suhartono and Neil Chatterjee of Bloomberg.

Warsito is bullish on shares of Indonesian manufacturing and infrastructure firms, Bloomberg reported. The industrial and materials sectors combine for 13.7% of EIDO’s weight and 13.3% of IDX’s weight.

Warsito’s bullish view on his home country’s equities jibes with that of some major global banks. In recent months, J.P. Morgan Chase and Morgan Stanley have all turned bullish on Indonesian equities.  J.P. Morgan recently said Indonesia has proven resilient in the face of Federal Reserve tapering. [Interest in Indonesia ETFs Increasing]

Earnings growth is expected to be solid in Indonesia at about 11% this year and 13% in 2015. “About 72 percent of companies in the benchmark index that posted fourth-quarter results as of March 3 surpassed analyst estimates,” according to Bloomberg.

With 2014 being an election year in Indonesia, analysts are expecting higher-than-market earnings growth for the financial services and consumer discretionary sectors. Those sectors combine for over 53% of EIDO’s weight and 46.4% of IDX, according to issuer data.

Pivotal will be Indonesia’s ability to manage its current account deficit, the primary reason why EIDO and IDX slumped last year. While the fourth-quarter deficit was less than 2% of GDP, the best rate in 18 months, it is expected some deficit will persist this year.

Indonesia recently enacted an export ban on some industrial minerals, including nickel, and market observers are waiting to see what impact that will have on the country’s current account situation. [Nickel ETNs Rally]

iShares MSCI Indonesia ETF

Tickers

EIDO IDX