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Indonesia's Inflation at Six-Month Low: ETFs in Focus

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Indonesia’s consumer prices increased 3.72% year over year in September and 0.13% on a monthly basis, per the Central Statistics Agency. The country’s core inflation, which excludes volatile items such as food prices, increased 3% year over year in September compared with 2.98% in August.


The inflation is well within the central bank’s target range of 3-5%. Moreover, it was almost on par with economists’ expectations of 3.7% year-over-year inflation. Economists surveyed by the Wall Street Journal predicted a 0.1% rise in consumer prices on a monthly basis.


Economic Fundamentals


Indonesia’s central bank unexpectedly cut its benchmark interest rate twice, by 25 basis points each in August and September. It now stands at 4.25%. This was primarily possible owing to the comfortably low inflation the country is experiencing (read: Indonesia Unexpectedly Cuts Interest Rate: ETFs in Focus).


However, central bank governor Agus Martowardojo has hinted at no further rate hikes this year. Moreover, per a Bloomberg article, the country’s largest lender, PT Bank Mandiri’s president director Kartika Wirjoatmodjo has stated that the current rates are optimal to simulate business activity.


Indonesia’s GDP grew 5% year over year in the second quarter of 2017, per Badan Pusat Statistik Indonesia. Per a World Bank report on Indonesia, the institution noted that it expects the economy to grow 5.1% this year. This is below the earlier estimates of 5.2%. Moreover, the World Bank expects the country’s economy to grow 5.3% in 2018. The growth rate is still far from president Joko Widodo’s target of a 7% growth rate during his term, which is supposed to end in 2019.


External Factors


Per a Bloomberg article, Indonesian equities experienced outflows of $2.1 billion in the September quarter.


The Federal Reserve has hinted at another rate hike in December. Moreover, it has announced its plans of curtailing its $4.5 trillion balance sheet beginning October.


However, the impact of these events on the Indonesian markets is still difficult to predict. This is primarily because markets are scaling record highs and showing lesser correlation to events that are generally a game changer for emerging markets (read: EM ETFs: What You Need to Know Before Investing).


In the current scenario, let us discuss a few ETFs focused on providing exposure to Indonesian equities (see all Broad Emerging Market ETFs here).  


iShares MSCI Indonesia ETF (EIDO - Free Report)


This fund is appropriate for investors looking to gain exposure to companies based in Indonesia. Thus, it offers a pure play on Indonesia.


It has AUM of $490.9 million and charges a fee of 63 basis points a year. From a sector look, Financials, Telecommunication Services and Consumer Discretionary are the top three allocations of the fund, with 33.4%, 14.9% and 13.7% exposure, respectively (as of Oct 4, 2017). From an individual holdings perspective, Telekomunikasi Indonesia, Bank Central Asia and Bank Rakyat Indonesia (Persero) are the top three holdings of the fund, with 13.2%, 11.2% and 9.4% allocation, respectively (as of Oct 4, 2017). The fund has returned 11.2% year to date and 2.4% in a year (as of Oct 5, 2017). EIDO currently has a Zacks ETF Rank #3 (Hold) with a High risk outlook.


VanEck Vectors Indonesia Index ETF (IDX - Free Report)


This fund seeks to provide a bet on Indonesia by investing in companies based out of the nation or the ones who have a great deal of business interest there.


It has AUM of $66.6 million and charges a fee of 58 basis points a year. From a sector look, Financials, Consumer Staples and Consumer Discretionary, are the top three allocations of the fund, with 28.5%, 17.8% and 12.4% exposure, respectively (as of Aug 31, 2017). From an individual holdings perspective, Bank Central Asia, Telekomunikasi Indonesia and Astra International are the top three holdings of the fund, with 8.5%, 7.8% and 7.1% allocation, respectively (as of Oct 5, 2017). The fund has returned 12.3% year to date and 1.9% in a year (as of Oct 5, 2017). IDX currently has a Zacks Rank #3 with a High risk outlook.


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