Indonesia Slashes Rates Again: ETFs In Focus

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Includes: EIDO, IDX, IDXJ
by: Zacks Funds

Indonesia's central bank cut its benchmark interest rate for the second time this year in its efforts to improve sluggish economic growth. Bank Indonesia (BI) slashed its benchmark interest rate by 25 basis points to 7%. BI had undertaken a similar sized cut in January after keeping rates unchanged for the last 10 months of 2015.

The recent rate cut was largely expected as the majority of economists surveyed by Reuters had predicted that BI would cut the key rate by 25 basis points.

In its efforts to ease the economy, BI not only lowered interest rates but also reduced the reserve requirement on rupiah deposits by 1 percentage point to 6.5%, effective from March 16. This move is expected to boost liquidity by more than $2.5 billion (34 trillion rupiah).

These measures from the Indonesian central bank come closely on the heels of the U.S. Federal Reserve taking a dovish stance with hopes of further rate hikes fading. The Indonesian bank stated that its measures to ease monetary policy are aimed at achieving solid macroeconomic stability with reduced inflationary pressure against a backdrop of uncertain global markets. It further pointed out that it will continue to work with the government to control inflation, stimulate domestic economic growth and bring about structural reforms.

The Indonesian president, Joko Widodo, popularly known as "Jokowi" has been quite vocal about his wish to see interest rates fall further to spur growth. As per a Bloomberg report, Indonesia's economy expanded just 4.79% last year, the lowest since 2009. This year, with inflation under control, the overall sentiment is that the rates could be slashed further. In 2016, BI expects inflation to be around the mid-point of its target range of 3% to 5%.

Apart from Indonesia, several other countries are also following the strategy of monetary easing, which generally comes in the form of an interest rate cut, to boost growth. Earlier this year, Bank of Japan's (BOJ) move to impose a negative interest rate for the first time surprised the markets. The BOJ Governor Haruhiko even stated that there will be no limit to efforts for easing monetary policy. The central bank may further expand asset purchases if required. Other Asian countries including Taiwan and Bangladesh have cut rates. Meanwhile, the European Central Bank (ECB) has also hinted on further policy easing in its March 2016 meeting.

Investor sentiment towards Indonesia has improved following its liberalization developments by easing restrictions on foreign investment in several industries including films, restaurants and healthcare 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 - the iShares MSCI Indonesia ETF (NYSEARCA:EIDO), the Market Vectors Indonesia Index ETF (NYSEARCA:IDX) and the Market Vectors Indonesia Small-Cap ETF (NYSEARCA:IDXJ) - that have gained 6.2%, 7.2% and 6.2%, respectively, in the last 10 days. All three have a Zacks ETF Rank of 3 or a 'Hold' rating with a High risk outlook.

EIDO

This is the most popular ETF tracking the Indonesian market with AUM of $344.3 million and average daily volume of almost 756,000 shares. The fund tracks the MSCI Indonesia Investable Market Index, holding 86 securities in its basket while charging 62 bps in annual fees from investors.

The product is somewhat concentrated in both sectors and securities. The top five firms account for almost half of total assets, while from a sector point of view, financials dominates the fund's assets with 38% share. The fund has a heavy tilt towards large-cap stocks at 84%.

IDX

This ETF follows the Market Vectors Indonesia Index, holding a basket of about 45 companies that are based or do most of their business in Indonesia. The product puts about 54.6% of total assets in the top 10 holdings, suggesting moderate concentration. Large caps are pretty prevalent, as these make up 83% of assets. With respect to sector holdings, financials again takes the largest share at 34.9%, followed by consumer staples (18%) and consumer discretionary (14.4%).

The product has amassed $98.1 million in its asset base while it trades in volumes of around 89,000 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 $5.3 million and average daily volume of about 2,000 shares. The fund tracks the Market Vectors Indonesia Small Cap Index and charges 61 bps in annual fees.

Holding 29 stocks, the product does a decent job of spreading out as the top 10 securities hold about 62% weight. However, it is a bit concentrated from a sector outlook, as financials takes the top spot at 42.1% while industrials and energy round off the next two positions at 23% and 14.7%, respectively.

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