Indonesia: ETFs for emerging gains

by Mark Salzinger, editor The Investor's ETF Report

This month we add two Indonesia ETFs to our coverage, iShares MSCI Indonesia Investable Market (EIDO) and Market Vectors Indonesia (IDX).

Among Asian countries, Indonesia has one of the best records of GDP growth — both strong and consistent over the past decade. With its large population, natural resources wealth and burgeoning middle class, Indonesia is poised for continued growth.

The Asian currency crisis of 1997-98 put Indonesia’s economy to the torch and decimated its currency, but changes in the crisis’wake paved the way for the country’s recent economic success.

The longstanding regime of President Suharto fell in 1998, and after decades of authoritarian rule and dependence on foreign capital, subsequent governments have progressively instituted reforms and opened markets.

Moody’s and Fitch have upgraded Indonesia’s debt to an investment-grade rating in the past year, crediting strong economic growth and fiscal discipline. Over the past decade, Indonesia’s annual GDP growth rate has dipped below 4% only once, in 2002.

Since the Asian currency crisis, Indonesia’s external debt as a percentage of GDP has fallen from 150% to 27% in 2011, while the nation’s foreign currency reserves have more than quintupled, from $20 billion in 1997 to $110 billion in 2011.

Indonesia has benefited from generally rising commodity prices over the past decade. Indonesia is the world’s #8 exporter of natural gas and has nearly four billion barrels of proved oil reserves (about one-fifth that of the U.S., and ranking just ahead of Australia).

With nearly 250 million people, Indonesia is the fourth most-populous nation in the world, and the third largest democracy.

While many of its people still live in poverty, Indonesia’s economy is driven largely by domestic consumption, which accounts for more than 60% of GDP.

Indonesia also has a relatively young population (median age of 34.7 years, vs. 40 years for the U.S.), whose long working lives have the potential for strong income growth.

Helping real income gains are two important factors: low levels of unemployment and inflation. Unemployment has fallen in nearly a straight line from a high above 11% in 2006 to just over 6% recently.

Inflation, recently 4.6%, is well below the Indonesian central bank’s 5.5% target, allowing the bank to lower interest rates three times in the past 12 months.

Market Vectors Indonesia and iShares MSCI Indonesia Investable Market have similar portfolios. Large-cap stocks make up roughly 80% of each portfolio, led by a heavy weighting to financials (about 32% in each).

The biggest difference between the portfolios, and it’s not much of one, is that IDX has slightly larger allocations to two economically sensitive sectors, energy (10.1%, vs. 7.8% for EIDO) and materials (10.0%, vs. 8.0%).

EIDO holds more than twice as many stocks (87) as IDX (42), but both are concentrated in their top holdings to about the same extent (61% in the top 10 positions for EIDO, 55% for IDX).

Each has an average market capitalization of about $12.2 billion. Their expense ratios are both slightly less than 0.60%.

Of these two nearly identical ETFs, we prefer EIDO. Since its portfolio is a little broader, it provides a little more exposure to the domestic Indonesian economy.

It holds more stocks, and it has performed slightly better since its inception than IDX. This year, IDX has lost 3.9%, vs. a 2.3% loss for EIDO, over worries that energy exports to China will slow along with economic growth across the region.

Since its inception in 2004, the Dow Jones Indonesia Stock Index has generated a total return of nearly 300%. However, the index lost roughly 60% of its value in 2008 and is up just slightly more than 5% since the start of 2011.

Learn more about this financial newsletter at Mark Salzinger's The Investor's ETF Report.

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