Indonesia ETF (IDX) Shrugs Off Earthquake, But Not Bubble Fears

by on April 7, 2010 | ETFs Mentioned:

In the pre-dawn hours on Wednesday, Indonesia became the latest country to be rocked by a natural disaster, as a 7.7 magnitude earthquake occurred at sea about 200 kilometers northwest of the Indonesian island of Sumatra. The quake was felt throughout Sumatra and Malaysia, and there were news reports of electrical outages throughout the country. The earthquake also sparked a tsunami alert in Thailand, as authorities began issuing warnings for coastal areas popular with tourists. Thailand’s National Disaster Warning Centre warned there was a high risk of a tsunami along the Andaman Coast, the same area where more than 5,000 people dies following a 2004 tsunami. But the quake only caused small waves to wash up on Thai shores, and the warning has since been lifted.

Indonesia ETF In Focus

Reports of damage from the quake were scarce, and casualties were expected to be minimal. The Jakarta Stock Exchange was operating normally on Wednesday, as major metropolitan areas shrugged off news of the overnight earthquake and went about business as usual. The earthquake seemingly had little impact equity markets, but other factors weighed on an Indonesian stock market that had been soaring higher in recent sessions. Trading in the Market Vectors Indonesia ETF (IDX) was heavy on Wednesday, with share volume exceeding twice the average daily level after less than three hours of trading. IDX was recently trading down about 0.5% on the day, potentially putting an end to an impressive rally in Indonesian markets.

The country’s benchmark Jakarta Composite Index recently hit a new all-time high after the central bank elected to leave interest rates unchanged IDX, which tracks the Market Vectors Indonesia Index, is up about 19% on the year, and has gained more than 175% over the previous 52 weeks.

That impressive run-up has some investors concerned that stock prices have run ahead of fundamentals, as Indonesian equities are now trading at some of the highest pricing multiples in Asia. Moreover, investors are coming to realize that the days of low interest rates are numbered, particularly as signs of inflation begin to emerge. “For the first half of the year, I think the market will still see an increasing trend but it will slow down in the second half as inflation starts to rise and the central bank is expected to increase interest rates,” said Harry Su, head of research at PT Bahana Securities.

Disclosure: No positions at time of writing.