Why Indonesia Belongs In The BRIC

by on August 3, 2010 | ETFs Mentioned:

Trouble has been brewing for sometime now in developed markets; high unemployment rates and slow growth in the U.S. have combined with a gloomy currency outlook and huge budget deficits in Europe to leave many worried about two of the most important economic areas in the world. However, emerging markets have continued to soar higher led in large part by the BRIC countries of Brazil, Russia, India, and China who have all posted high levels of growth and relatively solid budget situations even in this uncertain time. Yet, one emerging market is always forgotten from the list of top up-and-coming countries, often hiding in the shadow of its more famous counterparts; Indonesia.

Indonesia is spread out over more than 17,500 islands and contains close to 230 million people, putting it just behind the U.S. as the fourth most populous country on Earth. The country is a member of the G-20 and was a member of OPEC but now uses all of its oil to fuel its economy and quit the cartel several years ago. Indonesia has seen a rocky past decade or so as the country transitioned from the military dictatorship of Suharto to democracy while simultaneously dealing with the Asian Financial Crisis in 1998 which hit the nation especially hard. However, Indonesia managed to quickly turn things around after this event and become a large exporter and a tourist destination for many developed markets in the area including Singapore and Australia [also read Looking For Green Shoots? Try Southeast Asia ETFs].

Main Drivers of Indonesia

Indonesia has a well-diversified economy considering its relatively low GDP per capita which is below $4,000. The country has extensive tourism operations centered around the island of Bali, a massive hydrocarbon industry and an increasingly important manufacturing base. This is largely due to the country’s relatively skilled workforce and quality education system which ranks in the top fifty for overall quality, math and science education, and extend of staff training according to the Global Competitive Index report.

This high level of skill has combined with rapidly rising wages in China to give manufacturers an even bigger reason to consider expanding operations in the country. In fact, although GDP per capita grew by 11% in each of the past three years, the country still has among the lowest labor costs in the region, with wages that are roughly one-fourth the level of Malaysia and half the going rate in China. This low-cost looks to make the quickly growing country a manufacturing powerhouse in the near future as more businesses look beyond China for cheaper options [also see Beyond The BRIC: Ten Country-Specific Emerging Markets ETFs].

Dynamic Consumer Economy

Unlike many countries in the region, Indonesia has a robust consumer driven economy which is rare for a country of its economic development level. This is largely due to the country’s large middle class and its strong population trends; by 2012 the middle class will have increased by 50%, representing the addition of 27 million households to its ranks. Additionally, the country has slightly more than half (55%) of its population under the age of 30, and one-third under the age of 15 which could be good news as these citizens age and reach their top earning years in the near future.

These trends have allowed the country to post consumption levels as a percentage of GDP at just over 63%, which has helped to insulate the country from the recent downturn in developed markets and could sustain the country should the U.S. and Europe continue to have sluggish growth for the foreseeable future [also see Indonesia ETF Soars On Commodity Strength].

Problems Remain

Despite these positives, the country remains a third world nation that suffers from high levels of corruption and a high level of political instability although this particular risk has moderated in recent years. Government bureaucracy has also taken its toll on the country and is a large deterrent to future growth in the country. In a recent competitiveness report, the country was ranked in the bottom third for both number of procedures required to start a business, time to start a business, and burden of customs procedures, suggesting that the country has a long way to go to make itself more appealing to manufacturing organizations and to make it easier for small businesses to flourish in the country.

Additionally, as the world’s largest Muslim country, it has also seen a fair amount of terrorism over the past decade, with several attacks at the Western tourist hot spot of Bali. However, these attacks have been limited as of late and Bali now has extremely high levels of security to prevent any future incidents [also see Seven Most Corrupt Country ETFs].

Ways To Play With ETFs

Currently, there are two ways to play the dynamic Indonesian market with ETFs; the MSCI Indonesia Investable Market Index Fund (EIDO) and the Market Vectors Indonesia Index Fund (IDX). Below we profile some of the key differences between these two fund which offer exposure to the Indonesian economy;

  • IDX- This fund holds 29 securities in total with its heaviest weightings going towards financials (25.2%), industrial materials (20%), and consumer goods (14.7%). IDX has a heavy focus on large cap companies which make up the vast majority of the fund’s holdings at close to 68.4%; large and medium caps evenly split the remaining assets. This Market Vectors fund charges an expense ratio of 0.68% but it has performed very well not just in 2010 but over the last 52 weeks as well; it has posted a 37.3% gain over the past 52 weeks and a 20.8% gain so far in 2010 [see fundamentals of IDX here].
  • EIDO- iShares’ foray into the Indonesia market started with EIDO which tracks the MSCI Indonesia Investable Market Index which is a free-float adjusted market capitalization weighted index designed to measure the performance of equity securities in the top 99% by market capitalization of equity securities listed on stock exchanges in Indonesia. Due to this, the fund holds nearly twice as many securities as its more established counterpart. EIDO also has a heavy allocation towards financials which make up 28.7% of the fund’s total assets, followed closely by energy (13.4%), and telecom services (13.3%).  The fund charges a slightly lower expense ratio of 0.65% but it is up just 15.5% since its inception in early May [also see Five Head-To-Head ETF Matchups To Keep An Eye On].

For more ETF ideas make sure to sign up for our free ETF newsletter.

Disclosure: No positions at time of writing.