Indonesian stocks have underperformed other Asia-Pacific markets in the lead-up to the country's election that was held on Wednesday, April 17, as investors remained cautious about the outcome. Early "quick counts" fell in line with poll predictions and indicate that incumbent president Joko Widodo looks likely to claim victory over his rival, former armed forces Lieutenant Prabowo Subianto, although Subianto claims that he won the popular vote, leaving the possibility of a legal challenge open.
Assuming president Widodo remains in power, investors will closely monitor his reform agenda relating to the economy, namely opening up the country's financial markets to more significant foreign investment and freeing up restrictive labor laws.
"Bureaucratic reform is a must for Indonesia's economy to fire on all cylinders," David Sumual, chief economist at PT Bank Central Asia, told the Nikkei Asian Review. "Many investors complain about bureaucracy ... Policy consistency, how to improve the ease of doing business, fiscal and labor reform are also important," Sumual added.
Those wanting to trade the volatility surrounding the Indonesian election can gain exposure to the country's stocks using the three exchange-traded funds (ETFs) discussed below. Let's take a closer look at each fund and crucial technical levels swing traders should watch.
iShares MSCI Indonesia ETF (EIDO)
Launched in 2010, the iShares MSCI Indonesia ETF (EIDO) seeks to track the investment results of the MSCI Indonesia Investable Market Index. The fund captures the Indonesian market well by investing in large-, mid- and small-capitalization stocks, with a tilt toward the financial and consumer goods sectors. EIDO's narrow average spread of 0.04% and daily turnover of 1,155,867 shares makes the ETF suited to all forms of trading. Investors pay a 0.59% management fee, slightly above the 0.48% category average. Trading at $26.87, with assets under management (AUM) of $636 million and offering a 1.91% dividend yield, the ETF is up 6.20% on the year as of April 18, 2019.
EIDO shares made the bulk of their year-to-date (YTD) gain in January and have spent the past three months consolidating to form an ascending triangle – a pattern that suggests upside continuation. The fund's price jumped nearly 2% on above-average volume Wednesday to break above the pattern's top trendline as it became likely that president Widodo was on track to win a second term as the country's leader. Traders who buy the breakout should look for a move up to the twin price peaks near $30 set in early 2018. Manage risk by placing a stop-loss order below the 50-day simple moving average (SMA) and moving it to the breakeven point if the price breaches the late January swing high at $27.74.
VanEck Vectors Indonesia Index ETF (IDX)
The VanEck Vectors Indonesia Index ETF (IDX), created in 2009, aims to provide similar returns to the MVIS® Indonesia Index, which consists of large liquid Indonesian stocks. Benchmark constitutes don't need to be headquartered in Indonesia but must generate at least half of their revenue in the Southeast Asian country. The ETF's top-weighted stocks include PT Bank Rakyat Indonesia (Persero) Tbk (BKRKF) at 8.71% and Bank Central Asia at 7.83% and Perusahaan Perseroan (Persero) PT Telekomunikasi Indonesia Tbk (TLK) at 6.91%. With only 14,639 shares changing hands per day, traders should use limit orders to minimize slippage. As of April 18, 2019, IDX has $44.33 million in net assets, charges a 0.57% management fee, issues a 2.09% dividend yield and is up 6.80% YTD.
Since bottoming at $18.40 in October last year, the IDX share price has traded up almost 30%, placing the fund firmly in bull market territory. Like EIDO, the fund staged a breakout above an ascending triangle in Wednesday's trading session, indicating that the bulls have taken control of price action. Those who open a long position here should set a take-profit order in the vicinity of February 2018 swing high at the $26 level and position a stop beneath the April 16 low at $23.03. Consider moving the stop order to the breakeven point if the fund's price takes out the 52-week high at $24.15.
Global X FTSE Southeast Asia ETF (ASEA)
With AUM of $20.69 million, the Global X FTSE Southeast Asia ETF (ASEA) seeks to replicate returns of the FTSE/ASEAN 40 Index. Although not a pure Indonesia ETF play, the fund does allocate about 20% of its assets to the country. ASEA selects its stocks from the five founding nations of the Association of Southeast Asian Nations (ASEAN) and carries 40 holdings in its portfolio. It has the highest management fee of the three ETFs discussed with an expense ratio of 0.65%, making it more suited to shorter holding periods. Like EIDO, the fund provides a good bet on financial names, with a 55.28% allocation to the sector. ASEA is up 6.56% YTD as of April 18, 2019, in line performance wise with the other Indonesia ETFs. Investors receive an above-market-average yield of 2.95%.
After spending three months tracking sideways, the ASEA share price started to slowly grind higher in early April. More recently, a tight pennant pattern has formed over the past two weeks, suggesting a continuation of the uptrend. The ETF's price broke above the pennant's upper trendline yesterday and looks poised to continue its upward momentum. The relative strength index (RSI) sits well below overbought territory, giving the price plenty of room to move higher before further consolidation. Traders who go long should look for a test of the triple top that formed over the first three months of 2018. Protect trading capital by setting a stop below the pennant's lower trendline.