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As Treasury yields continue to rise in the U.S., concerns over emerging markets are building in tandem. These high beta markets are witnessing asset outflows thanks to weakened currencies and the perception that a further increase in U.S. yields will dull the appeal of these nations even more.
Seemingly, emerging markets are taking turns being sold off on a nearly daily basis, with losses exceeding 4% not uncommon. This trend first struck China, then India, and now Indonesia is in the crosshairs too (see all the Asia-Pacific Emerging ETFs).
Indonesia Sell-Off in Focus
Indonesian stocks experienced a massive sell-off in Monday trading with the Jakarta stock exchange plunging by 5% in the session. The nation’s currency also tumbled, pushing the rupiah to multi-year lows against the U.S. dollar.
The reason for this latest sell-off stems from the country’s growing current account deficit as exports decreased yet again. It doesn’t help that many of the country’s top exports are commodities that have fallen out of favor, including 25% losses in price for coal and palm oil since the end of 2011, according to Bloomberg.
If that wasn’t enough, inflation is also becoming a huge concern in Indonesia, as consumer prices are currently rising at an 8.6% clip. This is especially true given that the country’s central bank recently met and kept rates unchanged, suggesting that there is little concern from their perspective regarding the currency’s struggles as of late (read Indonesia ETFs Slide as Rupiah Tumbles).
Add this in to a seemingly more hawkish Federal Reserve back in the U.S., and investors have a recipe for disaster in Indonesia. Asset prices have been tumbling across the board in the nation, and there are definitely worries that the trend will continue in the months ahead as well.
“Indonesia has seen a gradual but persistent bout of bad news, with slowing growth, quickening inflation and then the current-account deficit,” said Leo Rinaldy, a Jakarta-based economist at PT Mandiri Sekuritas, a unit of the nation’s largest lender by assets. “The implication going forward is that demand for dollars will increase.”
Market Impact: Indonesia ETFs
As you can imagine with this cloud of bad news, investments in Indonesia have been plunging lately. Currently, there are three ways to play Indonesia with ETFs, and all of these options have been crushed in this latest bout of weakness. Below, we highlight some of the key details regarding these funds for those looking for further insights into this extremely sluggish market:
iShares MSCI Indonesia ETF (EIDO - ETF report)
The most popular ETF tracking the Indonesian market is EIDO, a product that follows the MSCI Indonesia Investable Market Index. The fund holds about 100 stocks in its basket, charging investors 60 basis points a year in fees for the exposure (see Southeast Asia ETF Investing 101).
EIDO is a bit concentrated in financials as these account for roughly 25% of assets, followed by consumer sectors which combine to make up a similar amount of assets. The product is a bit light on healthcare, energy, and utilities, while it has a significant focus on large cap stocks.
The ETF was down about 6.5% in Monday trading, pushing its three month loss to 25.8%.
Market Vectors Indonesia ETF (IDX - ETF report)
This is the original Indonesia ETF, having made its debut in January of 2009. The product beats out EIDO by a single basis point in fees, making it a slightly cheaper choice. However, by tracking the Market Vectors Indonesia Index, IDX allocates its assets to roughly 50 companies at time of writing.
Financials make for the top sector in this product, trailed by consumer staples (15%) and consumer discretionary (13%). The product is a bit light in health care, industrials, and real estate, while it has a bit more diversified country holding thanks to the index’s focus on companies that do at least half of their business in the country and not necessarily those that are based in the nation.
This ETF fell by 5.6% in Monday trading on solid volume, while its three month loss is now standing at 24%.
Market Vectors Indonesia Small Cap ETF (IDXJ - ETF report)
For a focus on the smallest companies in Indonesia, investors have this relatively new product from Market Vectors. The ETF tracks an index of small and micro cap securities that are heavily exposed to Indonesia, holding roughly 30 stocks in total (read Avoid These 3 Emerging Market ETFs).
The portfolio is pretty concentrated in a few choice sectors though, as real estate (33%), industrials (27%), and energy (20%) combine to make up four-fifths of the total assets. Still, the portfolio is relatively well-spread out from an individual holding perspective, as no single company makes up more than 10% of the total.
This somewhat thinly-traded ETF saw an increase in volume on Monday, though the price tumbled by 5.9%. From a longer term perspective, the ETF has lost about 25.6% in the trailing three months, making it a severe underperformer as well.
For extremely long term focused investors, Indonesia remains well-positioned thanks to its consumer centric market and a huge (not to mention young) population. However, it may continue to see short-term volatility for a number of reasons.
These include worries over growth rates, a tumbling currency, and general disdain for emerging markets, all of which are combining to push Indonesian securities down to fresh lows. And given the current trend in the space, we could definitely see more losses for this market in the near term (see instead Emerging Market Dividend Growth ETF Hits The Market).
This suggests that the best course may be to avoid this market for the time being, at least until the rupiah can stabilize and investors regain their trust of emerging markets once more. Until then, look for more uncertainty in the Indonesia ETF space, as well as a number of other high beta emerging markets in the region.
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Author is long IDX