The iShares MSCI Indonesia ETF (NYSEArca:EIDO) and the VanEck Vectors Indonesia Index ETF (NYSEArca:IDX) are up an average of 12.5% year-to-date. Economic data support more upside for stocks in Southeast Asia’s largest economy.
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.
Recently, Fitch Ratings affirmed Indonesia’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BBB-‘ with a Positive Outlook.
“Indonesia’s ratings balance a low government debt burden, favourable growth outlook and limited sovereign exposure to banking-sector risks with weak – but strengthening – external finances compared with ‘BBB’ category peers and some lagging structural factors, including governance standards and a still difficult – but improving – business environment,” said the ratings agency in a note.
Earlier this year, Standard & Poor’s elevated Indonesia’s sovereign credit rating to investment-grade territory. Stocks in Southeast Asia’s largest economy have been solid this year, but are also lagging the MSCI Emerging Markets Index.
Improving domestic consumption, government capital spending and further structural reforms, along with potentially loose monetary policies, could help support the Indonesian market.
“The Indonesian authorities have continued to strengthen their macroeconomic policy record with a focus on macro stability and sustainable growth since Fitch revised Indonesia’s Outlook to Positive from Stable in December 2016,” said Fitch. “Credible GDP growth assumptions in the revised budget for 2017 were recently approved in parliament, illustrating an apparent shift away from the overly ambitious annual growth targets adopted in budgets in the past several years.”
EIDO is seven years old and tracks the MSCI Indonesia Investable Market Index. The ETF holds 92 stocks. Financial services names account for almost 32% of the ETF’s weight while, but EIDO is adequately leveraged to the Indonesian consumer as the consumer discretionary and consumer staples sectors combine for more than 27% of the ETF’s weight.
For more information on the developing economies, visit our emerging markets category.