Indonesia, Southeast Asia’s largest economy, is again proving to be a solid idea for investors looking for tactical, single-country emerging markets exposure via exchange traded funds.
For example, iShares MSCI Indonesia ETF (NYSEArca: EIDO) and the VanEck Vectors Indonesia Index ETF (NYSEArca: IDX) are up an average of 4.2% year-to-date after returning an average of almost 17% last year.
Some market observers believe stocks in Indonesia 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.
“Among emerging market, we think that countries such as Indonesia, an exporter of palm oil, coal and oil, should benefit from improving terms-of-trade and resilient growth,” according to a note by Strategy-Pavillion Global Markets posted by Dimitra DeFotis of Barron’s.
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. Some estimates indicate Indonesian GDP could increase by 5.3% or more this year.
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.
Analysts point out that Widodo is adding jobs in major construction projects for unskilled labor, which could stimulate demand for basic consumer goods. Indonesia’s central bank has lowered interest rates this year, something to be mindful given the hefty financial services weights found in EIDO and IDX.
“While core and headline inflation still are on the low side, headline inflation should increase this year due to the government’s plan to curtail fuel and electricity subsidies – which will ultimately increase fuel and electricity prices for consumers – and because of growing food prices. In this context, it becomes unlikely that the Bank Indonesia (BI) will cut rates further … Against this backdrop of stable rates and sustained economic activity, we expect portfolio inflows into debt and equities to increase this year. This should also support the Indonesian rupiah (IDR) against the U.S. dollar (USD),” according to the Strategy-Pavillion note seen in Barron’s.
For more information on the developing economies, visit our emerging markets category.