Indonesia ETF Surges Ahead

More than one year after the market bottom, most equity ETFs have seen a big rebound, but few have been able to match the meteoric rise of the Market Vectors Indonesia ETF (IDX), which is up more than 200% since last March. In fact, only two non-leveraged ETFs have outperformed IDX over the time period: coal (KOL) and preferred stock (PGF) (see our full list of top performing ETFs over the past year). With IDX up close to 10% already in 2010, some investors are wondering if the Indonesian economy can continue to surge ahead or if a bubble has begun to form.

A number of data points suggest that good times are still ahead for the Indonesian economy as it looks to continue its post-financial crisis growth. UBS is forecasting 6% growth for the economy over the next two years, while Bank Indonesia, the country’s central bank, recently upped its growth rate to 5.6% for the year.

Impressive projected returns are nothing new for Indonesia, but controlling risk has historically been a challenge for Indonesia, particularly as corruption remains a significant problem in this emerging market. However, Indonesia is currently experiencing one of its most stable political periods since Suharto was removed from power in 1998. This relatively stable political climate has allowed the rising middle class to increase its consumption, which has helped to boost consumer spending in Indonesia. In January, auto sales rose 69%, the highest growth in a year, while sales of other non-durable goods also increased. Growth in imports of capital goods in January hit 35.6% from the previous month’s 9.29%, indicating preparation for more investment.

Sino-American Tensions

Another key driver of Indonesian growth relates to increased interest and activity from U.S. firms, part of which may be attributable to the recent strains in relationships between the United States and China. “What we are seeing is a diversification of sourcing from U.S. companies away from China toward Indonesia in a number of areas, such as footwear, textiles and clothing and furniture, we do see a lot of prospects there with increased interest from U.S. buyers coming to Indonesia” said Trade Minister Mari Pangestu in an interview with Bloomberg Television in Jakarta. This trend suggests that further tensions between the two superpowers will ultimately be to Indonesia’s benefit.

Indonesia ETF Profile

IDX consists of the 28 securities included in the Market Vectors Indonesia Index, a benchmark that tracks the performance of companies that are based in or generate at least half of their revenues from Indonesia. The fund is skewed towards large firms, with almost 60% of holdings in large cap securities. IDX has a diverse mix for sectors with just under one-quarter in financial services and materials, with the energy (15%) and consumer discretionary (12%) sectors rounding out the top four. IDX charges an expense ratio of 0.71%.

2010 Outlook: Interest Rates In Focus

In order to further encourage growth, the central bank has kept rates at a record low of 4.5%, which is still high compared to many of its Southeast Asian neighbors. Inflation remains in check for the time being, but at close to 4% may be approaching the tolerable limit. In addition, many other central banks, including China, India, and Australia have raised rates recently, which may force the country to raise rates sooner rather than later in order to prevent asset outflows, ensure low levels of inflation, and prevent an asset bubble from developing in the world’s fourth most populous nation.

Disclosure: No positions at time of writing.