Emerging markets are an important part of the global economy and increasingly significant contributors to the global growth. Their high return potential and low correlation with the developed markers are main reasons why they should be a part of any diversified investment portfolio.
Most investors think about China and India when planning to invest in emerging Asian countries and many investors already have some exposure to these giant nations. Further, with both these countries facing significant headwinds currently, it is time that the investors take a serious took at some of new rising countries in that region. Indonesia is one such country which offers solid growth potential for future. (Read: India ETFs: Trouble On The Horizon?)
Indonesia was one of the worst suffers of the Asian currency crisis in 1997-98. The country has since transitioned from a dictatorship riddled with corruption and inefficiency to a democracy on the path of fast growth driven by significant market reforms.
The economy has grown at an annual rate exceeding 5% in seven of the past eight years, mainly due to increasing consumption by the rising middle class. The country now has a population of more than 240 million, behind only China, India and the U.S. (Read: Time to Buy the Singapore ETFs)
Foreign exchange reserves have risen to $110.5 billion (as of March 2012) from about $20 billion in mid 1997. Thus the currency, (which had declined about sevenfold during the crisis) has become much more stable with the central bank willing to defend it using reserves. At the same time, the external debt has declined from over 150% of GDP in 1998 to 26.7% of GDP in 2011.
Indonesia was one of the very few countries which had a positive stock market performance in 2011. Its bond market was the best performer in Asia last year. (Read: Why Colombia ETFs May Continue to Rise)
The economy is expected to grow at 6.1% and 6.6% respectively in 2012 and 2013 (per IMF) after an impressive 6.5% growth in 2011. GDP for Q1 grew 6.3% year-over-year, which while slightly down from the 6.5% growth recorded in the previous quarter, is still one of the highest growth rates in the world.
Rising domestic demand in the country is able to offset the weaker export demand. 65% of the GDP is domestic consumption driven in the Southeast Asia’s largest economy and thus the economy remains much less exposed to global economic headwinds.
Foreign direct investment has been rising. During the first quarter, the country attracted $5.6 billion in FDI (up 30%), which seems to be in-line with the governmentÂ’s target of attracting $22.4 billion in FDI this year, 18% higher than last year.
Moody’s and Fitch have recently upgraded the credit rating of the country to investment grade.
Looking at the negative side of the story-Inflation has been creeping up towards 6% and fiscal consolidation is the main solution in containing inflation (difficult task due to massive fuel subsidies). Corruption and poor infrastructure remain some of the main hurdles to faster growth.
Last week, the central bank left the key rate unchanged at a record low of 5.75% for the third straight month, after having cut the rate by 25 bps earlier this year and by 50 bps late last year.
The investors currently have a choice of two ETFs which provide exposure to the broader Indonesian economy.
Market Vectors Indonesia Index ETF (IDX)
IDX seeks to track Market Vectors Indonesia Index, which provides exposure to publicly traded companies that are domiciled and listed in Indonesia or generate at least 50% of their revenues in Indonesia. The fund currently manages $508.9 million in assets and holds 43 securities.
Van Eck recently cut the expense ratio to 57 bps from 60 bps earlier. In terms of sector exposure, financials are at the top with 30.2% weight, followed by energy (15.1%) and consumer staples (13.6%). The ETF has returned 48.4% to the investors since its inception. The fund's annual dividend yield is 1.57%.
iShares MSCI Indonesia Investable Market Index Fund (EIDO)
EIDO tracks the MSCI Indonesia Investable Market Index, which is designed to measure the performance of stocks in the top 99% by market cap of the stocks listed in Indonesia.
The ETF holds $238.8 million in 87 securities and is thus must more diversified than IDX. However, like IDX, this fund also has largest allocation to financials (31.5%), and the next two are consumer discretionary (16.8%) and consumer staples (12.2%). The fund charges 59 bps and has risen 16.7% since inception.