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Indonesia Growth Sluggish Despite Reforms: ETFs in Focus

Indonesia’s reforms and growth plans received a setback with the country’s GDP growing at a slower-than-expected pace in the first quarter of 2016. The statistics bureau stated that the country’s gross domestic product increased 4.92% in the first three months of the year, below the median expectation of 5.05% in a Reuters poll.
 
As per a Bloomberg report, Indonesia’s economy expanded just 4.79% last year, the lowest since 2009. The first quarter number was also down sequentially as the GDP growth rate was 5.04% in the final quarter of 2015 (read: Top and Flop Country ETFs of Q1).
 
The first quarter GDP growth rate was highly disappointing considering that this Southeast Asian giant had aimed to get the full-year growth rate back above 5% this year. The government's target for growth is 5.3% in 2016, while the central bank's outlook is in the range of 5.2–5.6%.
 
However, investors should not shun the Indonesian markets all together based on the first quarter GDP data. It should be noted that the GDP growth figure did show promising improvement over annual growth of 4.73% in the year-ago period. The unemployment rate also came down to 5.50% in February from 6.18% in August (read: 4 EM ETFs that are Still in Green this Year).
 
Meanwhile, the head of statistics bureau Suryamin said that the lower sequential GDP was primary due to cyclical reasons with economic activity being the slowest in the first quarter and strengthening in the fourth.
 
The Indonesian economy has been suffering due to plummeting prices of the country’s commodities like palm oil and coal. The outlook for the country improved after the Indonesian president, Joko Widodo, popularly known as "Jokowi" took office in October 2014. He introduced a host of economic reforms and increased spending on infrastructure. In fact, he has been quite vocal about his wish to see interest rates fall further to spur growth. Jokowi targets to get the annual growth rate up to 7% in 2019, i.e. by the end of his term (read: Indonesia ETFs in Focus on Third Rate Cut).
 
The central bank has cut the key benchmark rate three times in the first quarter, by a total of 75 basis points. Investor sentiment toward Indonesia has improved following its liberalization drive, which eased restrictions on foreign investment in several industries including films, restaurants and health care earlier this month. Jokowi’s move to deregulate the traditionally protectionist economy should help in accelerating growth and making the Indonesian business environment more conducive for new investment.
 
A Closer Look at 3 Indonesian ETFs
 
In the light of these developments we highlight three ETFs – iShares MSCI Indonesia ETF (EIDO), VanEck Vectors Indonesia Index ETF (IDX) and VanEck Vectors Indonesia Small-Cap ETF (IDXJ). EIDO and IDX lost almost 2% each in the last trading session, while IDXJ remained unchanged. All three have a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (see: all Asia-Pacific Emerging ETFs here).
 
EIDO
 
This is the most popular ETF tracking the Indonesian market with AUM of $528.5 million and average daily volume of more than 720,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 84 securities in its basket while charging 63 bps in annual fees from investors.
 
The product is somewhat concentrated in both sectors and securities. The top five firms account for more than 46% of total assets, while, from a sector point of view, financials dominates the fund’s assets with 35.7% share (read: Fragile Five ETFs Not At All Fragile This Year?).
 
IDX
 
This ETF follows the MVIS Indonesia Index, holding a basket of about 43 companies that are based or do most of their business in Indonesia. The product puts about 54.8% of total assets in the top 10 holdings, suggesting moderate concentration. With respect to sector holdings, financials again takes the largest share at 35%, followed by consumer staples (18.7%) and consumer discretionary (15.5%).
 
The product has amassed $115.5 million in its asset base while it trades in volumes of around 68,000 shares. It charges 58 bps in fees per year from investors.
 
IDXJ
 
Unlike the other two, this is a small-cap centric fund. It is unpopular and less liquid having AUM of $5.8 million and average daily volume of about 2,000 shares. The fund tracks the MVIS Indonesia Small-Cap Index while it charges 63 bps in annual fees.
 
Holding 27 stocks, the product is slightly skewed toward the top two firms at 8.1% and 7.6%, respectively, while the other securities hold less than 7.2% share. However, it is a bit concentrated from a sector look, as financials takes the top spot at 39.3% while industrials and consumer discretionary round off the next two positions at 18.4% and 13.2%, respectively.
 
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ISHARS-MS INDON (EIDO): ETF Research Reports
 
VANECK-INDONES (IDX): ETF Research Reports
 
VANECK-INDO SC (IDXJ): ETF Research Reports
 
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