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.
Nevertheless, growth will continue on a steady pace, with the Asian Development Bank projecting growth to come in at 5.8% next year and inflation rising to 6.9%, largely due to the cut in fuel subsidies.
The diminished fuel subsidies also means that the government will have more money to allocate toward spending on other infrastructure and social projects.
iShares MSCI Indonesia ETF
For more information on Indonesia, visit our Indonesia category.
Max Chen contributed to this article.