EIDO: Positive Economic Prospects To Support Equity Market Sentiment

seekingalpha08-14

Indonesia's economy has a bright outlook ahead of it in 2024.The country's Central Bank will likely be able to cut interest rates soon.The equity markets appear attractively priced, considering the ...

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Despite its lower weighting in the MSCI Emerging Markets Index, this country will likely be very hard for investors to ignore due to its demographic setup and long-term favorable economic performance. Recent signals look very positive, as it appears that Indonesia is positioned to deliver stronger growth this year, especially if the Central Bank begins cutting rates later this year. Inflation is under control, which should support consumer sentiment during the second half of this year. Data by YCharts Indonesia equities have significantly underperformed emerging markets during the first half of this year, but this trend could likely reverse as growth in Indonesia begins to bounce back to the highs of last decade. Equities remain attractively priced, which could help drive a short-term rebound in the market during the second half of this year. Since I last covered this ETF in 2022, iShares MSCI Indonesia ETF, inflation has dropped and the country's growth outlook has improved substantially. Based on these changes, I think now is a solid time to increase exposure to Indonesia, as it appears ready to outperform other emerging markets in 2024 and 2025. Indonesia's growth should return to its historical average and remain above 5% in the coming years, which bodes well for the equity markets. Economic Bright Spot: Economic Sentiment To Support Equity Market Indonesia's economy has been a relatively bright spot amid a slowdown in other economies, as Indonesia's GDP grew by between 5-5.3% in 2022 and 2023. The outlook for 2024 also appears very favorable, as Indonesia is targeting 5.4% growth this year. In comparison, growth in other emerging and developing countries will likely be lower, according to projections from the IMF. Despite its favorable economic profile, the MSCI Indonesia Index has only slightly outperformed MSCI Emerging Markets in the past decade. However, Indonesia has a history of massively outperforming in certain cycles, as seen in 2009-2013. MSCI Despite its strong economic prospects, the Indonesian stock market underperformed MSCI Emerging Markets in 2023, following its circa 25 percentage point outperformance in 2022 when emerging markets declined by nearly 20%. Indonesia equities have also slightly underperformed in 2024 but could be poised to break out later this year as the economy continues to improve. This current setup has created attractive valuation for the Indonesian stock market, which only trades at a slight premium to MSCI Emerging Markets, and offers a notably higher dividend yield of 4.7%. Indonesia also trades at a slight discount to other regional peers such as Thailand, Vietnam, and India. One of the major factors holding back the country's economy, the surge in inflation in 2022, has resolved significantly in 2024. Inflation peaked at around 6% in September 2022 but has since declined to below 3%, more in line with its historical average. Indonesia Inflation TE The reduction in inflation helped to boost consumer sentiment in Indonesia, as household consumption rose by 4.9% YoY last quarter. This rebound in consumer growth, coupled with government spending, helped Indonesia's growth bounce back to its pre-covid highs. ING Another potential catalyst, which could begin showing an impact in 2025, is the potential for the country's Central Bank to begin cutting rates, now that inflation has remained stable in recent months. Inflation recently fell to 2.1% last month and has remained below 3% since May, which should give the country's Central Bank plenty of room to cut rates in H2 2024. The country's benchmark interest rate has been around 6% since early 2023, well below the lows of 2022. If inflation continues to remain below 3%, the country's Central Bank may be able to cut rates during its next meeting. Trading View Bank Indonesia recently decided to hold rates steady, despite the positive inflation readings, during its last meeting. A recent poll of Reuters analysts projects that it will cut rates by 25 basis points at its next meeting. These announcements could help boost equity sentiment in 2024 and consequently result in stronger growth in 2025. Examining The iShares MSCI Indonesia ETF With only a small amount of liquid ADR options, ETFs are generally the easiest way to access markets like Indonesia. The iShares Indonesia ETF (NYSEARCA:EIDO) is one of the easiest ways to gain exposure to the market at a reasonable valuation. While the broader market trades at around 17x earnings and over 2x book value, this ETF trades at a lower valuation. This ETF also has a relatively low expense ratio of 0.59%, in line with other regional emerging market ETFs. iShares One factor to note is that this ETF has very strong exposure to Indonesian financial companies, much more so than most emerging market ETFs. iShares This ETF also makes a relatively concentrated bet on individual names, such as Bank Central Asia, though not as much as the MSCI Indonesia Index. In comparison, this index invests around 56% of its assets in these top three holdings, while the iShares MSCI Indonesia ETF only invests around 46% of its assets in these three companies. iShares Banks may be a good way to play this economic recovery, as banks may be able to boost loan growth and maintain asset quality as economic conditions normalize. Fitch Ratings recently upgraded Indonesian banks from BBB- to BB+ due to the improved outlook of Indonesia's economy. Moreover, this approach also allows one to access the market at circa 12x earnings with reasonable growth prospects. Final Thoughts Indonesia's economy appears positioned to trounce other emerging markets in the coming years, yet the equity markets have had a dull performance this year. This trend will likely reverse during the second half of this year, allowing Indonesia to begin outperforming other emerging markets. Financial companies account for nearly 60% of the MSCI Indonesia Index, so it is hard to avoid exposure to this theme. There are several alternatives to avoid heavy exposure to Indonesian banks, although these options are limited as many of the OTC Indonesian companies have low liquidity. 1) Alternative ETF: The VanEck Indonesia ETF (IDX) only invests around 30% of its assets in financial companies. The main factors to note are the smaller AUM (circa $28 million) and lower liquidity (around 12k shares/day). In comparison, the iShares MSCI Indonesia ETF has an AUM of over $300 million and an average daily trading volume of around 554k. Seeking Alpha 2. Telecom Company: Telkom Indonesia (TLK) is a highly liquid ADR that provides exposure to Indonesia's telecommunications industry. I covered this company several months ago, and think it looks attractively positioned following the post-Q1 2024 pullback.  Overall, I think the iShares MSCI Indonesia ETF and Telkom Indonesia are two excellent vehicles to gain exposure to Indonesia's stock market. Indonesia's stock market has multiple catalysts ahead of it, due to economic prospects and the lower valuation, and it appears positioned to outperform emerging markets and regional peers.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2459819456"}