The iShares MSCI Indonesia ETF (NYSEArca: EIDO) and the VanEck Vectors Indonesia Index ETF (NYSEArca: IDX) returned an average of 16.8% last year, well ahead of the 10.9% gained by the MSCI Emerging Markets Index.
Some market observers believe stocks in Indonesia, Southeast Asia’s largest economy, can rally again in 2017. Favorable government policies and a surprisingly accommodating central bank were among the policies driving Indonesian equities and the aforementioned ETFs higher.
“Indonesia has made several positive adjustments since the taper tantrum in 2013, including a narrower current-account deficit, lower gross external indebtedness and higher foreign-exchange reserves, all of which help to reduce its vulnerability,” said Andrew Tilton, Goldman Sach’s chief Asia-Pacific economist, in an interview with Bloomberg.
President Joko Widodo’s government is facing a widening budget deficit and is anticipating the tax amnesty to help bring finances back in to balance.
“Indonesia’s ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with a weak external position compared with ‘BBB’ category peers that makes the country relatively vulnerable to shifts in market sentiment and a weak – but improving – business environment,” notes Fitch.
Emerging markets offer attractive valuations, but monitor currency risks. Some market observers and professional investors think emerging markets equities will be able to again firm up even amid dollar strength. The good news is that Indonesia’s rupiah was the best-performing Asian currency last year.
A sharp increase in U.S. Treasury yields and a stronger U.S. dollar have weighed on emerging assets, but BlackRock argued that a gradual Federal Reserve rate hike could limit further gains in yields and the USD, and the risks have already been baked into emerging assets.
Although some developing economies have been viewed as vulnerable to Donald Trump’s presidency and there are concerns about the impact of interest rate increases by the Federal Reserves on emerging markets that have to service dollar-denominated debt, some market observers believe emerging equities can perform well again this year.
Indonesia’s “economy may expand 5.3 percent in 2017 from 5 percent estimated for this year, Tilton said. The risks include a legal cap on the country’s fiscal deficit and the high sensitivity of the rupiah to U.S. policies and capital flows, he said,” according to Bloomberg.
