Indonesia ETFs Surge On Surprise Rate Hike

While the pain in emerging markets has been pretty widespread, the epicenter of the turmoil has arguably been in Indonesia. The huge island nation in Southeast Asia was long an emerging market gem, but it has fallen by the wayside in weeks past as worries over broad emerging markets, growth, and inflation have rocked this country more than others.

In fact, the currency of the nation, the rupiah, has lost more than 10% of its value against the dollar in the past month alone, with exchange rates vs. the greenback collapsing this summer, after a pretty stable start to 2013.

Meanwhile, concerns are building over growth and inflationary levels in this consumer-centric economy. Growth has fallen below 6% a year, while inflation is now coming in at over 9% a year, eroding any GDP gains in the process.

This is a rough backdrop for any nation, but when you add in broad emerging market woes thanks a possible QE-taper, you have a perfect storm for losses. This is pretty much what has happened in the past few weeks as the country’s three main ETFs, the two large cap focused funds (EIDO) and (IDX), as well as the small-cap centric (IDXJ), have plunged.

All three have lost more than 20% in the past one month time frame, pushing the group to within striking distance of their 52 week lows. Plus, IDXJ has actually lost more than 25% of its value in the period, putting the product decidedly in bear market territory.

Ray of Hope?

While this has obviously been a horrendous situation, there is some hope that the selling pressure might finally be coming to an end. Prices for this Indonesia ETF trio have moved a bit higher in recent days, and the latest news from the country could act as a true positive catalyst as well.

That is because the country’s central bank has stepped in to support the rupiah, and hopefully restore some confidence in the nation’s financial system. Bank Indonesia raised its benchmark rate by fifty basis points up to 7% in an unscheduled move.

In addition, it also raised the deposit facility rate to 5.25%, while it also extended a swap agreement with the Bank of Japan. The moves helped to boost the rupiah in Thursday trading, while it let some investors feel as though the central bank was finally getting in front of the problem.

The move also comes as a number of other emerging market central banks have taken measures to support their struggling currencies as all have been losing ground as of late against the dollar. This kind of coordination could also help to boost confidence and might signal that the worst is nearing an end for these emerging markets, especially if these new measures produce results.

Market Impact

In addition to boosting the rupiah in trading, the moves also helped to stabilize the aforementioned Indonesian ETFs as well. All three moved higher by more than 4% following the news, on solid levels of volume too (see Can Indonesia ETFs Bounce Back?).

However, it should be noted that this sharp move higher doesn’t even put the ETFs back to breakeven for the trailing five day period. All are still down more than 5.5%, even with this big one day pop.

Furthermore, when taking a longer term look, the recent jump seems like a blip on the radar, as losses from multiple months are still significant. In fact, all three of the ETFs are still down more than 30% in the past three months, suggesting there is still a long way to go to get back to breakeven for these ETFs.

Bottom Line

Indonesia ETFs have been terrible performers as of late thanks to a number of factors. Rising inflation, slowing growth, and general emerging market concerns have plagued the country causing a near-crisis for the nation’s stocks and its currency (see instead 3 Emerging Market ETFs Still Going Strong).

However, a recent central bank move in the nation—as well as similar moves by other embattled emerging markets—could bode well for the country in the future. Should these policy decisions boost confidence and stem the emerging market currency slide, this could prove to be an interesting long term entry point for investors willing to tolerate significant volatility as this country (and others) adjusts to the new economic climate at hand.