EIDO - EIDO: Indonesian Banks Grow

2024-01-10 00:34:34 ET

Summary

• iShares MSCI Indonesia ETF provides exposure to Indonesian markets dominated by resident banks.
• These are experiencing solid growth thanks to the rate regime and solid underlying economic fundamentals.
• The Rupiah has also been performing well as the USD rates start coming down.
• P/Es are quite low, and there aren't any exceptional risks as far as the economy goes, with demographics playing heavily in EIDO's favour.
• Overall, not a bad pick.

The iShares MSCI Indonesia ETF ( EIDO ) gives investors exposure to primarily financial companies listed on the Indonesian exchange. There is a demographic appeal to Indonesia that cannot be understated, and ASEAN in general benefits structurally from factors that are likely to see it leading the world in 20 years or so. In the shorter term, we believe the Rupiah will perform well, and we see strength in financial exposures that are benefiting from rates that have caught up to the rest of the world. The PE looks decent considering the prospects.

Breakdown of EIDO

The standout elements are the large financial exposures that dominate the portfolio.

This is coming from a skew towards the country's largest financial institutions such as PT Bank Central Asia Tbk ( OTCPK:PBCRF ). These are seeing solid growth in NIs, which have increased more than 25% for BCA , as well as solid loan growth owing to the growing economy.

This is being supported by a hawkish central bank. Indonesian inflation is low and is comfortably within policy levels at 2.56% with respect to the bands that go as high as 4%. Inflation in economies like these is highly benign and a positive indicator, and a 6% interest rate doesn't seem to be jeopardising growth which remains at a solid 5% in GDP according to expectations at the closing of the 2023 data.

Also as a consequence, the Rupiah has performed pretty well. Up about 3% since lows a couple of months ago. With quite a lot of export in energy products that puts their currency in a decent situation considering how valuable energy continues to be, and we think that the Fed pivot probably will shine more light on currencies like the Rupiah which still offer higher yields.

Bottom Line

Indonesian demographics are also excellent , supporting the entire economy. The population is growing quickly, and the largest population cohort is between 10-14 years of age, with people on the cusp of entering the workforce. Its population won't be in decline till 40 years from now, giving it ample time to escape from the set middle-income trap and economically integrate with other ASEAN economies, each of which brings something of its own to the table, like technology and manufacturing excellence in Japan, able yuppies in Thailand, Burmese, Vietnamese and also Indonesian labour to bring the region forward. The region also benefits on the whole from the decline of China.

With the rate situation supporting not only strong NIMs at the banks but also stopping erosion of value from earnings yields on equities of around 9%, based on the PE ratio around 11x, EIDO looks pretty interesting. It's a productive economy where we don't worry too much about the Rupiah. The only downside is that the friction associated with maintaining a portfolio in Indonesia results in a 0.59% expense ratio, similar to the other iShares ETFs in Southeast Asia. However, the earnings yield and growth should keep investors' returns ahead of that, especially with the index having languished and possibly ready for some catching up.

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