Election Reignites Rally In Indonesian ETFs

July 25, 2014

Reform is in the air in Indonesia, which gives another boost to related ETFs already flying high.

Indonesia elected a new president this week, and local markets are reacting favorably, with the Jakarta Stock Exchange gaining more than 20 percent year-to-date. That’s good news for U.S.-based ETF investors who have three ETFs to choose from—each with various tilts to the financial sector.

The new face of Indonesia is Joko Widodo, a former furniture maker who grew up in a small village and is regarded by Stratfor, the Austin-based geopolitical think tank, as a pragmatic, uncorrupt and competent manager—and, not least, a break from Indonesia’s authoritarian past.

A break from that past and an increase in infrastructure investments could also lead Indonesia toward a firmer leadership role in the Asia-Pacific region, currently troubled by maritime disputes between China, Vietnam and the Philippines.

According to Stratfor, Widodo’s win may well lead to increased short-term capital inflows in the third quarter, which could, in turn, strengthen the Indonesian rupiah. In the long run, Widodo pledged to root out corruption, which should help stabilize government spending, including hefty government fuel subsidies, long associated with governmental corruption, and the central government’s budget deficit.

But Widodo’s reign won’t take effect until Oct. 20, and until then, Stratfor added that the most tangible effect of the election within next three months will be a positive impact on foreign investors’ confidence in the Indonesian market.

Widodo’s election and the market’s reaction to his win are similar to reactions to Narendra Modi’s recent election as India’s newest prime minister, setting the stage for a rally in India-focused ETFs. Like Widodo, Modi is regarded as a break from past politics and a harbinger of much-needed social and financial reforms.

To be sure, the country has been on a general trajectory of improved macroeconomic management for more than a decade, and its credit rating was upgraded to “investment grade” in 2011, according to the Central Intelligence Agency’s online “CIA Factbook.”

As noted, investors who want to bet on a possible turnaround in Indonesia currently have three ETFs to invest in, including:

3. Market Vectors Indonesia Index ETF (IDXJ | F-63) AUM: $8 million; YTD return: 25 percent

IDXJ is the lone ETF covering Indonesian small-caps. The fund’s index includes firms that produce at least half of their revenue in Indonesia, regardless of domicile. As a result, more than 10 percent of IDXJ’s portfolio is exposed to firms headquartered outside of Indonesia. IDXJ currently has a heavy tilt toward financials and industrials.

However, IDXJ is extremely difficult to trade, with less than $100,000 of shares exchanging hands most days, and wide bid/ask spreads averaging 0.91 percent. Closure risk looms for the fund, which launched in March 2012 and has an expense ratio of 0.61 percent, or $61 for every $10,000 invested.



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