Exchange traded funds tracking Indonesia, Southeast Asia’s largest economy, got off to a fine start this year, but the good times evaporated as rapidly as they appeared. Indonesian stocks, among the better emerging markets performers in the first quarter, were not immune to the sell-off that plagued developing markets in the second quarter.
Fears that the Federal Reserve will begin tapering its quantitative easing program later this year contributed to a major sell-off in Indonesia’s currency, the rupiah. So severe was the sell-off that at one point during the second quarter, rupiah forwards hit multi-year lows, helping to drag the iShares MSCI Indonesia ETF (NYSEArca: EIDO) to an almost 10% second-quarter loss. The Market Vectors Indonesia ETF (NYSEArca: IDX) also lost 10%. [Emerging Markets ETFs Pullback as Easy Money Dries Up]
Investors looking for second-half rebound candidates among emerging markets ETFs may want to look past Indonesian fare and that sentiment extends beyond equity-based ETFs to bond funds as well. While it is worth noting Indonesia’s central bank is taking a proactive approach to fighting rupiah weakness, including an interest rate increase last month and there is room for more rate hikes, there are other issues to acknowledge. [Indonesia ETFs Get Rate Hike Respite]
The rupiah is still one of the worst-performing Asian currencies this year, which has prompted foreign investors to ditch bonds denominated in the currency. Global funds sold 2.5 trillion rupiah ($250 million) of local-currency government bond holdings in the week after a June 22 fuel tax increase, report Neil Chatterjee and Yudith Ho for Bloomberg.
Outflows from rupiah-denominated bonds, should the trend continue, could weigh on several bond ETFs, including the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) and the WisdomTree Asia Local Debt Fund (NYSEArca: ALD). ALD and ELD each have double-digit allocations to Indonesian debt while EMLC features a weight of more than 7% to the country.
Compounding the potential woes investors face with Indonesia, the world’s fourth-largest country by population, is that equities there may not be much better than bonds. Earlier this week, Morgan Stanley downgraded Indonesia to underweight from equalweight. Prior to that PT CIMB Securities Indonesia cut its recommendation on stocks there, citing the possibility that higher fuel prices may stoke inflation, reports Harry Suhartono for Bloomberg.
On top of all that, the World Bank recently pared its outlook for Indonesian GDP growth this year to 5.9% and Morgan Stanley called Indonesia the Association of Southeast Asian Nations (ASEAN) most vulnerable equity market. Vulnerable indeed as EIDO and IDX reside an average of 6% below their 200 day moving averages.
Market Vectors Indonesia Index ETF
ETF Trends editorial team contributed to this report.