Broad Indonesia exchange traded funds could continue to strengthen, albeit at a slower pace due to the recent rate hike. However, the current conditions may be unfavorable for smaller Indonesian businesses.
While Indonesia’s economy expanded 5.2% over the first half, the slowest pace since 2009, economists expect growth to pick up in 2015, writes Reuben Sushman for SeekingAlpha.
Year-to-date, the iShares MSCI Indonesia ETF (NYSEArca: EIDO) rose 22.4% and Market Vectors Indonesia Index ETF (NYSEArca: IDX) gained 18.5%. Both ETFs are top heavy. EIDO market-cap weights include 48.3% mega-caps, 31.9% large-caps and 11.9% mid-caps. IDX includes mega-caps 39.9%, large-caps 46.4% and mid-caps 10.9%. Additionally, both are heavy on the financial sector, which makes up 37.5% of EIDO and 32.4% of IDX
While the ETFs target Indonesia, a good chunk of component holdings are domiciled in other countries. For instance, EIDO region tilts include 15.2% Hong Kong, 4.3% U.K. and 2.3% germany. IDX includes China 19.7%, Singapore 4.6% and Netherlands 3.0%.
In an attempt to head off rising inflationary pressures, the Indonesian central bank hiked rates by 25 basis points to 7.75%. The move would slow the economy, but it would also help cut the current account deficit and keep foreign investors from fleeing the market. [Indonesia ETFs Could Have More Room to Run]
The higher rates will also weigh on smaller companies, with smaller businesses paying upwards of 20% in annual lending rates. The Market Vectors Indonesia Small-Cap ETF (NYSEArca: IDXJ), which includes a 19.7% tilt toward mid-caps, 76.8% small-caps and 3.6% micro-caps, is up 21.3% year-to-date.