Domestic Demand Stokes Indonesian Stocks, ETFs

Contrary to popular belief, not all emerging markets have been laggards at the ETF level this year. A fair amount have have actually been pleasant surprises.

Count Indonesia-specific ETFs and those funds with ample exposure to Southeast Asia's largest economy among that group.

In the first quarter, the iShares MSCI Indonesia Investable Market Index Fund EIDO and the Market Vectors Indonesia ETF IDX returned 15.1 percent and 12.5 percent, respectively.

The PowerShares DWA Emerging Markets Technical Leaders Portfolio PIE was up 8.8 percent, stellar among diversified emerging markets ETFs, due in large part to its 14.4 percent allocation to Indonesia.

All those performances pale in comparison to the 25.5 percent returned by the Market Vectors Indonesia Small-Cap ETF IDXJ.

The good times for Indonesian equities and the aforementioned ETFs in 2013 may note be over. After closing at a record high on March 28, the Jakarta Composite Index may continue advancing this year, perhaps posting a gain of 17 percent, Alvin Pattisahusiwa, director of investment at Manulife Aset Manajemen Indonesia said in an interview with Bloomberg.

Pattisahusiwa cited gains in consumer-oriented shares as a catalyst for Indonesian stocks. Indeed, that is a familiar catalyst because domestic demand accounts for a significant portion of Indonesian GDP. Consumer spending accounted for almost 55 percent of the country's nominal gross domestic product in 2012, Bloomberg reported.

The aforementioned ETFs offer investors ample exposure to Indonesia's domestic demand story. For example, IDX, the oldest of the Indonesia-specific ETFs, allocates a combine 27.1 percent of its weight to consumer staples and discretionary names, according to Van Eck data.

EIDO's combined weight to those sectors is comparable. Although IDXJ, the lone Indonesia small-cap ETF, is heavily allocated to banks and industrials, staples do account for 13 percent of that ETF's weight.

In the interview with Bloomberg, Pattisahusiwa did not identify his stop individual picks among Indonesian stocks, but his fund's top five holdings as of Feb. 28 were Astra International, Bank Central Asia, Bank Mandiri, Bank Rakyat Indonesia and Telekomunikasi Indonesia, Bloomberg reported. That quintet represents roughly 44 percent of EIDO's weight.

Indonesia, the world's fourth-largest country by population, is expected to post GDP growth this year of 6.25 percent this year, up slightly from 6.23 percent in 2012. Amid rising inflation and slack materials demand, the Jakarta Composite and the aforementioned ETFs will likely need strong contributions from discretionary and staples shares to continue to the upside.

Interestingly, Indonesia's domestic consumption accounting for 55 percent is on par with what is seen in Thailand, though below the 74 percent in the Philippines, according to Bloomberg data. As is the case with Indonesia, the domestic demand story in the Philippines has often been cited as part of the bull case for that country's stocks.

More importantly, domestic demand has proven vital to investors' returns with ETFs. In addition to EIDO, IDX and IDXJ, the iShares MSCI Thailand Investable Market Index Fund THD and the iShares MSCI Philippines Investable Market Index Fund EPHE have been juggernauts again this year.

On the other hand, ETFs tracking export-dependent emerging markets such as the iShares MSCI Brazil Capped Index Fund EWZ have been laggards.

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